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I know the answer could vary from state to state, but since this is the first time I am leasing and all of my friends and family members who lease don't care about the fine details, I have to post this question online.

How does the tax get caculated on the lease? Here are two scenarios

Lets assume, The usage per month is $244 and the result of residual+selling price x Moneyfactor is $200/month

a) Tax will be calculated on the total amount of usage+Moneyfactor i.e, 244+200=444 x 0.08 (8%) = $479.52/ mo

b) Tax will be calculated on the usage then added to the money factor, i.e (244 x 0.08) + 200 = $463.52 /mo

A solid $624 difference at the end of the lease, which the dealer can easily hide in the payment and you walk away thinking I only paid $200 over invoice!
 

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In California the tax is calculated on the entire payment amount. This should be true for other states as well. The payment may be calculated by usage/residual to make it more transparent to the buyer, but to the government it is just a plain old rental charge of $444 and completly taxable.
 

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Enclave4Me said:
In California the tax is calculated on the entire payment amount. This should be true for other states as well. The payment may be calculated by usage/residual to make it more transparent to the buyer, but to the government it is just a plain old rental charge of $444 and completly taxable.
That just sucks! I am not buying the Finance charges just the vehicle, so if i plan to pay it upfront, won't it be just on the usage value?
 

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Leasing companies aren't lenders, they offer rental services. When you borrow money, you get a break from the tax man (they don't charge tax on the interest paid, but you really are buying the use of the money and should be taxed on that service). When you rent stuff, no such luck.

Basically, when you rent anything, you ARE buying the finance charges. The leasing company has bought the car and is either financing it themselves or beholden to investors to give a return. They are going to cover their costs which can be seen as equivalent to finance charges, but they aren't real finance charges since no money is being borrowed by you. That's why they are careful to use the "money factor" terminology rather than interest rates. You could just as easily calculate a lease payment using an interest rate and residual%. It's not interest, but just another part of the rental charge.

As for the prepaid lease, you'll never get a straight price paid minus residual divided by the time period calculation. Even if you paid down to the residual, there is still going to be a taxable monthly rental charge which is equvalent to the "interest" due on the residual car amount - but remember it isn't interest. They get to put your money in the bank and make money on it, so they may give you a break, but not to a point that they are giving away the use of their money. Also, you are taxed on cap reduction payments, so you really aren't saving any taxes here either.

Before the current relative transparancy in the leasing market, some early companies had some brutally bad lease deals. Since people couldn't do the math to back out what eqivalent interest they were being charged, and were commonly lied to, compaines were raking in the money to the point that the market had to be cleaned up. The car market is also very complex with different options and models to calculate for. This is why a fixed common formula has been derived; with a residual percent and a money factor they can calculate the lease payment for you on the spot rather than having to call a lease company and get a personal quote. It also allows the buyer and dealer to compare deals more easily, and leads to a more competitive market. Just because they are transparent with the calculation they use to compute your payment doesn't make it any different than a typical rent. And sorry, no equvalent break on the tax like you see with borrowed money.

Look at it this way: When you go to Budget and rent a car, you get a quote for $60/day. Just because Bob, the guy behind the counter lets you know that you can calculate how they get to this value, and gives you a formula which tells you that the car cost them $10 a day, and the remaining $50 is what they charge to cover their operating cost and profit, doesn't change the fact that you are renting the car for $60. And the tax will be on the $60 rental.

The same is actually true for anything you buy. Stores purchase merchadise for less than they sell it to you for. Doesn't change the fact that you pay sales tax on the final purchase price.

Sorry for the long winded response..... I need to get out more. Perhaps my Red Jewel Enclave will help when it comes in....
 

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Discussion Starter #5
Thanks for the detailed answer. When I go to Hertz or Budget to rent a car, they don't break the price down into so many little things, they say the rent is whatever a day plus tax.

A car dealer on the other hand breaks down the payment to all little components and complicate things, which makes you wonder if the calculation is done right and knowing car dealers reputation, whether they are not taking advantage of your lack of knowledge.
 

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Most captive leasing companies offer a rate discount if you pay the entire lease upfront. However, you have to measure the opportunity cost of loosing the use of that money (where it could be earning interest). In addition, and this is something I am not sure about, if you prepay a lease and the vehicle is stolen or wrecked, I don't know if you actually get your money back. Something to check into.

As for tax on a lease payment, most states charge you sales tax on the monthly payment (including interest). Some states actually calculate the sales tax on the total payments and then work it into the capitalized cost. Other states actually charge you sales tax on the entire capitalized cost, instead of just the payments, negating some of the monthly payment savings a lease offers over a purchase. For those states, including Texas, balloon finance payments tend to be more popular than leases.
 

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After reading Shappy's reply on balloon financing, I looked at the Gmac site re SmartBuy, which is balloon finance -- if you turn the car in, there's a disposition fee. Here in IL, I guess it's like Texas re taxes on a lease. It's supposedly been challenged to no avail but they charge FULL tax on capitalized cost, not just the portion of the vehicle you're using. On a 24 and even 36 mo lease, it gets to be a huge amount added on a vehicle like the Enclave, well over $100 mo or more.

Does anyone know how the SmartBuy works in IL? Is the balloon amount set off the lease rate residual % and what about the SmartBuy loan rate? In other words, if you did a SmartBuy in IL (or elsewhere for that matter), how is it calculated? For example, on a 36mo/15K lease, residual is 60%, lease rate is 7/2% (or .03 MF). Are these the same terms for a SmartBuy and set by Gmac or is this all negotiated at the dealer level?

Final question, how much is the disposition fee at turn-in (presuming no excess wear and tear or mileage, just as on a lease)?

In IL, if the rates are the same as lease, this could be a great option and allow you to not overpay the IL sales tax as if you used up 100% of the vehicle -- but just that portion while you "own" it.
 

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Without knowing your zip code, I can only give you general information, but for Cook county IL, the residuals are the same as a lease, but the rate is 8.2% for all terms.

I don't know what the turn-in fee is, but around $350 is customary in the industry. I am sure your dealer will be happy to give you the exact number. Keep in mind that the turn-in fee is waived on both leases and balloon contracts if you stay in the GM family for your next vehicle.
 

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I am confused, is the lease rate 7.2 or 8.2%?? I was told by the Buick lease guy it was 8.2 but I keep hearing here that it is 7.2? and what is the Smart buy thing? ???
 

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Discussion Starter #11
jackiemd said:
I am confused, is the lease rate 7.2 or 8.2%?? I was told by the Buick lease guy it was 8.2 but I keep hearing here that it is 7.2? and what is the Smart buy thing? ???
MY UNDERSTANDING is Smart buy means you pay like a lease for the term of the lease, like 36 or 48 months, then at the end there is a predetermined ballon payment to buy the vehicle for example they set the ballon price to 26K

This way you keep the monthly payments lower than conventional payments when you are buying it. At the end of the lease term you can choose not to buy the vehicle and payment a penalty to get out of the smart buy program.
 
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