Can You Trade In Your Leased Car for a New Lease?
Many individuals find themselves leasing a car with the hopes of eventually trading it in for a new one. However, it's important to understand the nuances of this process and the potential benefits and drawbacks. In this article, we will explore the decision-making process involved in trading in a leased car and the various factors that should be considered.
Introduction
My friend recently used his old leased car as a "down payment" or cap cost reduction for his new lease. This arrangement conveniently resolved the issue of disposing of his old car, but it came at a cost. Dealerships often find this approach appealing as it maximizes their profit margins. However, whether trading in a leased vehicle is beneficial or not depends on a myriad of factors, making it a highly individualized decision.
Understanding the Benefits
Trading in a leased vehicle can indeed be advantageous, but not without careful consideration. Here are some key factors to consider:
1. Return or Trade?: The decision to return or trade a leased vehicle often hinges on the trade value of the existing car versus the cost of buying out the lease. For instance, if your leased vehicle is valued at $20,000, but purchasing it would require paying 2 remaining monthly payments of $300 each, totaling $600, and the residual value of the car is $18,500, then you would owe $19,100 to buy out the lease. In this scenario, you have $900 in equity.
If you opt to trade the car, the dealership will handle the lease buyout, and you can apply that $900 towards the cost of your new vehicle. If you simply return the car, you miss out on this equity.
2. Damage or Over-Mileage: Another instance where trading a leased vehicle can be beneficial is if your vehicle has sustained any damage or exceeds the agreed-upon mileage. For example, if you need to pay a $1,000 over-mileage fee, your buy-out cost would be $20,500. If the dealer offers a trade-in value of $20,000, you would save $500 by trading the vehicle rather than returning it.
3. Sales Tax Benefits: In many states, trading in a leased vehicle can result in a significant sales tax break. When you lease a car, you pay sales tax on the entire price, whereas when you trade, you only pay sales tax on the difference. Therefore, you receive a sales tax break on the new vehicle equal to the value of the trade multiplied by the sales tax rate. This means you can save more money if you trade and purchase a new vehicle compared to simply returning the leased one.
If you simply return the vehicle at the end of the lease, you do not benefit from this sales tax break.
Case Study: Trading a Leased BMW
Last year, I traded my leased BMW for a new one. The dealership offered me a trade-in value of $20,000, which not only reduced my buy-out cost but also provided me with a sales tax break of approximately $1,500. This arrangement was particularly beneficial because it meant I could enjoy the right to drive a brand new car without incurring a higher cost due to leasing. Had I simply turned the leased car back, I would have missed out on the sales tax break and the equity.
It is important to note that the rules for sales tax breaks on leasing can vary by state. In my state, leasing requires payment of sales tax on the entire price, while trading in allows for a break based on the trade-in value.
Conclusion
In summary, trading in a leased car can be a good option, provided it is done thoughtfully and strategically. Always consider the trade value, over-mileage fees, and sales tax benefits before making a decision. Every person and situation is unique, and what might be best for one person may not be best for another. It is wise to take the time to assess all the factors involved and consult with a professional to ensure you make the most informed decision.