Do I Pay Tax on a Lease Buyout?

Drivers who lease an automobile for a set term must make a decision when the lease is up: Turn in the car to the dealer or leasing company, or purchase the car as a lease buyout. A lease buyout can be an economical way to buy a car with a history you know, depending upon the residual rate you agreed to at lease inception. Because a lease buyout is different from a lease, you may be faced with paying sales tax on the agreed-upon price.

When you lease a car, you may pay a small monthly use tax on the lease depending on your state or local tax rate. When you purchase a car, you pay sales tax on the total price of the vehicle. Since the lease buyout is a purchase, you must pay your state's sales tax rate on the car. As of September 2011, Oregon, Alaska, New Hampshire, Montana and Delaware do not assess a sales tax on consumers, but if you live in one of these states, you may be subject to local taxes.

To calculate the sales tax on your lease buyout, look at your lease to find the residual value of the car. This is the price you negotiated when you signed the lease, and is an estimation of its value at the end of the term, including depreciation. Multiply your state sales tax by the residual price. The sales tax you pay on your buyout will be less than if you purchased your car initially, but it could still be hundreds of dollars depending upon the sales tax rate.

If you cannot afford to pay for the car in cash, with good credit, you can arrange a lease-buyout loan from either the original lender or another financial institution that offers loans for used cars. The sales tax and any other fees, such as registration, can be added to the loan amount. Be aware that you will pay interest if you finance the car and roll in the sales tax, but if you don't have the cash to pay for the car, this may be your best option.

As much as you love the car, a lease buyout may not always be as the best option for you, and you may need to shop around for another car. If your residual payment is much higher than the going market rate for the car, or if your original lease stipulates a large buyout fee, or if you can find a better deal on a newer lease, it may be best to pass on the lease-buyout. Negotiate with your lease holder. Lease-buyout loans may also carry a higher interest rate than new or used cars. Do your homework and weigh the pros and cons before you buy the leased car.