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The Finances and Taxes of Car Leasing

Both leasing and buying have advantages and disadvantages, just like renting or buying a house. The most obvious difference is that with a lease, you get a new car every few years and don’t have to deal with selling the car. If you like having the newest technology and the most up-to-date safety features, leasing might give you the freedom to make periodic upgrades without breaking the bank.

When you buy a car, each payment you make builds equity, and once you pay off the loan, the car’s yours, and you can sell it or donate it. If you buy the car outright without a loan, you save even more money.

How to figure which makes the most financial sense for you? Consider the following factors:

  • Your monthly cash flow. Leasing a car often has a lower monthly payment compared with financing a car with the same loan terms. With a lease, you’re paying for the depreciation of the car during those years rather than the whole vehicle cost. If you need access to more cash every month, leasing may be more favorable.
  • Available savings for a down payment and initial fees. Most lease agreements have low down payments, or perhaps you can get the dealer to waive the down payment. You’ll pay less for sales tax on a lease — tax is calculated in most states on only the monthly payments, not the total cost of the car. With the lower down payment, a lease may have a smaller impact on your budget and cash balance.
  • How much you drive. If you drive more than 10,000 or 15,000 miles per year, depending on the lease agreement, you’ll have to pay extra for each mile. Many leasing companies charge 15 to 20 cents per mile for additional miles, but you could pay less — 10 cents per mile — if you buy the miles upfront when you negotiate the lease. Although the extra-mileage penalty sounds daunting, if you were to trade in a car you bought, you’d be penalized for above-average mileage.
  • How hard are you on your car? If you think it’s likely you’ll be getting dings and scratches on your car or have a high risk of damage to it from kids’ activities or other hazards, a lease may not be for you — there are wear-and-tear fees that typically cost three months’ lease payments.
  • Whether you drive the car for business. Whether owned or leased, you can take a business deduction for your vehicle, if you meet IRS rules, and leases may offer some advantages here. However, the deduction rules and calculations are complicated, so be sure to consider the implications in your situation before you make a decision.
  • Insurance. When you lease a car, you may be required to get more coverage than you want. Leasing companies have their own standards as to what qualifies as acceptable insurance, which may be higher than what you’d personally deem necessary.

Buying a car is almost always cheaper in the long run, according to most calculations. The longer you own the car, for the most part, the more you save by buying. Consider how much flexibility will matter to you. But the decision always comes down to your budget and your driving needs.