Do you pay sales tax on a lease buyout?

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In states that charge sales tax on cars, you’ll have to pay that tax if you lease a car. When you’re leasing a car, the rules on when and how much sales tax to pay vary by state. If you buy your leased car at the end of your lease, you may be required to pay sales tax as part of the purchase.

What is a lease buyout?

A lease buyout, which usually occurs at the end of your lease period, is when you opt to keep your leased car rather than return it to the dealer.

When you buy out your lease, you’ll pay the residual value of the car (its value at the end of the lease) plus any applicable taxes and fees. Not all leases allow for a lease buyout, so read the terms and conditions of your lease.

Does sales tax apply to my lease buyout?

Car lease tax varies from state to state, so it’s best to check your local regulations. Depending on your state, you may have already paid all of the required sales tax. At the very least, you have likely already paid at least some sales tax on the car, so it’s highly unlikely you need to pay taxes on the complete original price of the leased car.

Most states roll the sales tax into the monthly payment of the car lease, though a few states require that all the sales tax for all your lease payments be paid up front. In a couple of states, such as Texas, lessees must pay sales tax on the full value of the leased car versus just the tax on payments during the time of the lease.

How do I calculate the sales tax on my lease buyout?

Before you can calculate the sales tax on your lease buyout, you’ll need to be aware of the car’s residual value. Your lease payments are determined in part by the difference between the car’s original value and its residual value.

The best way to calculate the amount of sales tax on your lease buyout is to look at the original lease paperwork, where you can find a breakdown of the taxes.

Then, contact your state’s Department of Motor Vehicles or visit its website for clarification on how sales tax is calculated on leased cars in your state. That will help you know what to expect for sales tax when you buy out your lease.

When should I consider a lease buyout?

There are a couple of factors to consider in determining whether it makes sense to do a lease buyout. First, check whether your car is worth at least as much as the payoff amount. If it’s not, that’s probably a good sign that a lease buyout is not a great option.

Another factor to consider is the car’s condition at the end of the lease. If you’ve exceeded your mileage allowance or your car has excessive wear and tear, you may be hit with additional fees if you turn your car in. Depending on the amount you’ll be charged, it may make sense to do a lease buyout.

The bottom line

Deciding whether to buy your leased car hinges on several factors. Knowing whether you have to pay sales tax (and how much) when you buy your leased car can play a role in deciding whether it makes sense for you. Laws vary by state, so check your lease paperwork and your state’s Department of Motor Vehicles for the regulations on sales tax where you live.

Remember, too, that you can turn in a leased car or do a buyout of your leased car at any franchised dealer that carries your brand. If you are uncomfortable working with the dealer you originally leased the car through, simply take your business to another dealership.

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Written by
Dan Miller
Points and Miles Expert Contributor
Dan Miller is a contributing writer for Bankrate. Dan writes about loans, home equity and debt management.
Edited by
Associate loans editor