Buying vs Leasing a Car: Which is Best?
There are always a lot of questions when it comes to getting a new vehicle. The entire journey of getting behind the wheel of a new ride is made even more complicated these days by production delays, low inventory, and soaring prices on dealership lots. Let’s imagine you’ve found the perfect vehicle in-stock and ready to drive away—do you buy or lease?
Buying or leasing is one of the most common dilemmas people face when they’re ready to commit to a new car, truck, or SUV. Which method is the best? It all depends on your situation, but there are some important things to consider—including tax implications for each option.
The Argument for Leasing
Leasing, at least on the surface, is one of the most hassle-free ways to get a new vehicle. For a brand-new vehicle on their lot, dealerships may provide a lease that lasts usually about three years. After that, the person leasing the vehicle will be able to either buy the vehicle at the agreed-upon price when the deal was signed or drop it off at the lot and let the dealer sell the vehicle as used.
From the standpoint of a customer, leasing a vehicle is a good way to get the newest model with no existing wear and tear. Vehicles typically have several years of manufacturer’s warranty so any major issues that do come up should be covered and won’t come out of your pocket.
Many of the terms are laid out when the documentation is first signed so you can take time to think about your options at the end of the lease. With market situations always changing, it’s nice to have a future buy-out price locked in that you can then choose to exercise or pass on when the time comes.
For business owners, leasing has some tax benefits as well. Lease payments can be deducted from taxes based on what percentage of time the vehicle is used for business purposes. It can make those lease payments easier to swallow knowing they may be tax deductible.
The Argument for Buying
Sometimes owning something is better than knowing it has to be returned someday. Unlike a leased vehicle, an owned vehicle is an asset. The owner can choose to sell it later and pocket the cash or hang on to it forever. If you choose to finance the vehicle, you know that every payment made toward the vehicle is building equity.
Since you own the vehicle, you can also choose to modify it as you see fit. Want to add new wheels or other accessories? The value you add stays with your vehicle.
Ownership is also more flexible in terms of timing, even if you choose to finance instead of paying in cash. Even if there is a loan on the vehicle, it can be bought out and sold or traded in toward a new vehicle. Of course, any outstanding amount would be added to the new purchase price, but it does offer a level of flexibility that a fixed lease agreement does not.
Like leasing, buying a vehicle could also offer tax benefits for business owners. Purchased vehicles can have their depreciated value claimed at tax time. This calculation isn’t quite as simple as writing off lease payments for business owners but may offer some relief to business owners who feel buying is best for them.
The Argument Against Leasing
While leasing has a lot of clear benefits, especially for businesses, there are some downsides to consider before signing on the dotted line to lease a vehicle for the coming years.
One of the main drawbacks of leasing that many people mention is the mileage allowance. Generally, lease terms allow for 10,000 miles of driving per year. For many people, this is sufficient. For those with long commutes, it may not be enough. Returning a vehicle at the end of a lease term after going over the mileage allowance can be a costly shock to the wallet. Some lease agreements will allow for higher mileage allowances, but the monthly payments can increase quickly.
As mentioned above, leased vehicles tend to have their manufacturer warranty intact. However, this does not protect you from completing regular maintenance like oil changes. Missing important maintenance activities could lead to excessive wear and tear on a vehicle that is not covered by warranty or the lease agreement. In other words, you would be on the hook for an expensive repair to a vehicle you don’t even own.
Speaking of expensive, you may want to skip out on adding aftermarket wheels to a leased vehicle. Unless you remove them and put the stock wheels back on before returning the leased vehicle, those wheels go with the car. What’s more, the dealership won’t pay you for any upgrades made to the vehicle. It’s essentially upgrading the car on your dime for them to turn around and sell at a premium once the lease is done.
The Argument Against Buying
It should come as no surprise to hear vehicles are expensive, especially brand-new ones. Many people opt for car loans that usually last six or seven years. Once these later years roll around, the vehicle is no longer covered by a standard manufacturer’s warranty. Buying a vehicle could mean being on the hook for major repairs while still making those loan payments.
While upgrading is possible any time when buying, it can be difficult if a lot of money is still owed on the vehicle. Many people find themselves underwater on car loans and rolling the remaining loan into a new vehicle purchase only makes the problem worse over time.
In addition, when buying a vehicle, there is no guarantee on future value. If the model year turns out to be unpopular then it may be difficult to re-sell in the future whereas a leased vehicle is simply returned to the dealership where they can deal with the problem of holding an unpopular model.
There is no right or wrong answer when it comes to buying or leasing. Your unique individual situation will determine what makes the most sense for you. Cukierski and Associates, LLC, is here to help guide you in the right direction when making this important decision. Our trusted team can help you weigh the pros and cons, especially as it relates to tax treatment of the vehicle for business owners.
To speak with one of our tax experts for an honest discussion about your own situation, contact us today.
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