Auto Trade-In Rules

[Taxman]

I have a client that is an S-Corp and wants to trade in the company car that a Sec 179 deduction was taken 3 years ago on it. In the TB on page 10-9 it says the taxpayer can elect to treat the transaction as a tax-free disposition of the old car and the purchase of the new car.

What happens instead, if the taxpayer trades in the car and leases another car, would that be considered a sale of the car since the taxpayer can't claim depreciation on the leased auto?

[jainen]

standard lease

If it was a standard lease, no, it is not eligible for Section 1031 treatment. Some leases are actually financing arrangements for a purchase with a nominal buy-out at the end, and those could qualify for 1031 if otherwise eligible. Note that if the corporation owned the old car but the lease is in her own name, 1031 would not apply.

(1031 is a deferral of gain or loss, not "tax-free.")

[veritas]

Why client want lease?

Lease=Bad business decision


Client does not get the best price on car
Client pays to much for the use of money
Client can not get out of lease or payoff early
and


NO TAX ADVANTAGE

Advantage client thinks he's a big shot around the cracker barrel

[jainen]

Lease = good business decision

Lease = good business decision.

Minimum down payment conserves capital.
Lower monthly payment improves cash flow or qualifies for better car.
Easier accounting.
Pay only for value during years in use, nothing for when it is an older car.
Walk away at end of contract.

[TaxBird]

Lease=Bad business decision


Client does not get the best price on car
Client pays to much for the use of money
Client can not get out of lease or payoff early
and


NO TAX ADVANTAGE

Advantage client thinks he's a big shot around the cracker barrel

No offense Veritas but the validity of a business decision shouldn't be based on tax advantage alone.

Specific to the auto-lease question, I agree with Jainen; overall leasing is usually a better decision for a business. For individuals, maybe not.

I've seen some pretty kooky schemes cooked up for tax advantage that, while indeed saving taxes, were often times too complicated for the client to manage which drove up professional fees beyond the tax savings. Now that's a bad business decision.

[Taxman]

I Agree

with Jainen. In this situation, the client only keeps the cars for 3 years. Everytime he trades in or sales the car he gets nailed by the decline in the FMV of the car. For instance, the car he wants to trade in was $66,000 in 2003 and the dealer will only give him $25,000. If he had leased the car, he would not take a huge hit in the decline in the FMV of the car.

Granted leasing is not always the best decision but I think in his case it might be the better alternative.

[Taxman]

Trade In

The S-Corp owns the car and will also be the one leasing the next car. If the S-Corp leases the car instead of purchasing it, then gain will be recoginzed on the trade-in value offered for the car?

[Joe Btfsplk]

Lease or Buy?

I found this link which has a downloadable lease/buy calculatior.

http://ideas.repec.org/a/bla/jfinan/v27y1972i4p815-23.html

I did not download it since I don't anticipate having to use it.

There are some other web sites you can find if you search-- Google --"lease or buy"

[veritas]

Have to disagree

First of all I wasn't speaking to tax advantage or not primarily.

I can go buy a new car with no or low down all day long.

When I buy a car I know what I am paying for it. When ppl lease the only worry about the payment.

Leases generally have a high interest charge. Higher than a loan because most people are only concerned with the payment not the cost so they soak you.

If after one year I need to change- to bad your tied into a lease you can't get out of.

At the end of the lease you could have a penalty for to many miles and excessive wear and tear.

Leases are bad. Of couse if your the lessor they are good.

[jainen]

cash flow

>>most people are only concerned with the payment<<

It seems obvious to me that if (as you say) monthly payment is the primary concern, then a lease would be better than a purchase every time. Now, you might feel that a taxpayer SHOULD be more concerned about a different financial element, but "should" doesn't look that good on the credit app if they actually don't have the cash flow.

[veritas]

My experience

Is what causes my concern over leases.

That being said if a client negotiates a good price for the item to be leased and gets a good interest factor I would admit a lease may make better sense in some cases. On a luxury car the tax advantage could swing towards the lease over a purchase.

But my experince is they go to the dealership and the entire discussion is about the payment. Even recently when purchasing a new car and told them I would pay cash the sales person couldn't help slipping back into talking about the "payment". I had decided on the make, model I wanted before going to the dealership. I negotiated the best price online and told the dealership if they met my best price I would buy it from them. They agreed I ordered car and picked up in a couple of weeks. Also I will probably keep the car for at least 10 years. I like to get my moneys worth. Purchasing a car is a very unemotional thing to me since it simply a tool I need for work like a computer.

[jainen]

the next 30 seconds

>>keep the car for at least 10 years<<

Obviously you would not be a good candidate for a lease. You want to get whatever value an older car can provide. That is a good deal for you, but not right for some other customers.

Personally, the second time that salesman mentioned payments, I would have got up, walked into the manager's office, and demanded a qualified professional to serve me in the next 30 seconds.

[veritas]

with Jainen. In this situation, the client only keeps the cars for 3 years. Everytime he trades in or sales the car he gets nailed by the decline in the FMV of the car. For instance, the car he wants to trade in was $66,000 in 2003 and the dealer will only give him $25,000. If he had leased the car, he would not take a huge hit in the decline in the FMV of the car.

Granted leasing is not always the best decision but I think in his case it might be the better alternative.

The decline in value will be included in the lease payment.

[jainen]

a brand new vehicle

>>The decline in value will be included in the lease payment<<

Only during the time of the lease. At the end of the three years, the car is still worth, say, $10,000. You can buy the old clunker for that much, or walk away from it and put that $10,000 down on a brand new vehicle.

[veritas]

Thats what I was trying to say.