car - lease vs buy

25 Replies

Trying to assess whether we should buy a car or lease a car. Breakdown of our current situation:

1. we have one car (only need one car)

2. we drive less than 10,000 miles a  year

3. we use the car more than 50% for business related driving. (driving to our buildings, going to home depot, etc)

Should we buy or lease are next car? 

@Peter Fokas Leasing is the most expensive way to "own" a vehicle. You mentioned you put relatively few miles on your current car and that you use your car the majority of time for doing things for your rental properties. Is there any reason why you cant just pay cash (few thousand) for an older pick up? That way it would be easier when getting things from Home Depot and other miscellaneous things you need to haul for your buildings. Then if you want to either keep your current car or sell it to offset the cost of the truck. 

@Peter Fokas  

This is essentially a math problem to discuss with your accountant.  You want to find the threshold between owning the vehicle yourself and having your business reimburse you for use (mileage and stand-by allowance) and having the business own (or lease the vehicle) and you {possibly} taking a personal use allowance on your income when filing taxes.

Things are likely different in the U.S.A., but here leasing really only makes sense when you can write-off the lease costs as a business expense and you have no intention of buying out the vehicle at the end of the lease.   We have leased vehicles through our companies, but never personally for this very reason.

When purchasing a vehicle, we never buy new, always second hand - sometimes from a dealer or rental car agency, but just as often privately.  If you start looking for a vehicle before you actually need it (i.e. while your existing vehicle is still serviceable), you can find wonderful deals - my current work vehicle is a Jetta TDi wagon which was 18-months old with only 16K kms (10K miles) {just past the first oil change} when I bought if from a lady who decided she "needed" an SUV.   The car was fully loaded {something I would never usually buy} and the final price was 30% less than new.   If we purchase a vehicle, we plan to run it until its death.

We are presently trying to determine if we could downsize to a single vehicle and use a car share in place of a second vehicle (which is only seeing 5K miles per year at the moment).

A chat with your accountant should quickly narrow down the approach which best fits your situation.

Medium greenapartmenthires 1024x1024Roy N., Louer Louer Ltd. | 1.506.471.4126

Buy a used car or truck with cash.  Save the payment you would have been making so you can buy up (if needed) in a year or so.  Not having car payments will build your wealth immensely!

@Peter Fokas  

@Account Closed  say to buy a used car with cash. A viable option for some, but now we need to analyze opportunity costs. I can pay $8,000 cash for a used vehicle and watch my equity slowly depreciate as the years go buy, or I can pay $300/mo for a newer car and at least in the first year I will have the difference of $4,400 to invest or use in my business. I want to caveat this with saying: buying used is usually the best option in terms of long-term cost savings, but in terms of near-term opportunity costs, it is likely the worst option.

In terms of business purposes, you can deduct the business portion of the lease payment, similar to owning. The big difference between leasing vs. owning for business purposes is whether or not the car is considered a luxury auto (over $15,800 for 2014 I believe). If the car is classified as a luxury auto, it will limit the amount of depreciation you can deduct on your car. So if you purchase the auto, it can sometimes take 12+ years to fully depreciate the vehicle. This again will make leasing more valuable in the short terms for a business owner. If leasing, you will be limited to a "lease incursion" amount that addresses the luxury depreciation mentioned above, but it is usually a nominal amount. 

In SUMMARY:

Leasing is an excellent option to consider, especially when looking at short-term benefits. You realize cost savings and you can apply saved dollars to other areas of your business or investments. Buying a car is a better option for long-term purposes if you can afford it in the short term. The opportunity cost of the larger down payment and larger monthly payments often do not make buying a viable option to new investors or those who need cash in the short term.

Medium logo blackBrandon Hall CPA, The Real Estate CPA | http://www.therealestatecpa.com | Podcast Guest on Show #196

@Brandon Hall   You say assuming a three year outlook that leasing is much cheaper than owning. Using your own example of a $300/month lease vs a $8000 cash purchase of a vehicle, the monthly payments of the lease will exceed that $8000 after your 27th of 36 payments. 

I agree with you after the first year you would be ahead with an extra $4400 in your pocket and I understand opportunity cost. However, what is your ROI on investing that extra $4400? 5%, 10%, 25%? While you probably would, there is no guarantee you would even have a positive return on that investment. Also, while the number of people who would invest it and try to make it grow on this forum is probably high, in the general population how many people are going to see the opportunity cost of that money and not just spend it on something foolish because they have the extra cash burning a hole in their pocket?

As far as when you buy a new car versus leases it, there are plenty of dealers here in my area that are selling new cars for next to nothing down. Granted you still have to pay the sales tax, but I'm not sure that I agree with you on it being a much larger upfront requirement for financing a new vehicle rather than leasing it. I agree with you that you'll more than likely end up underwater on your new car purchase, especially with putting down a small down payment.

I never knew about the luxury auto classification. They really have a loose definition on "luxury auto" as I can only think of a few new vehicles that sell for less the $15,800 you mentioned. You mention depreciating your vehicle purchase. Wouldn't you be better off just using the mileage deduction? That's what I currently do, however my vehicle is not primarily used for business purposes. I'm not an accountant so you'll have to educate me on that one.

At the end of the day this comes down to risk for me. I've always been one to pay cash for vehicles and then drive them until they don't run anymore, sell them for whatever I can get and then start over. You already conceded the point that leasing long term is not cost effective and I should have stated in my original post. While I still meant leasing in general, I was talking more over the longer term. 

Am I missing out on the opportunity cost of my money, yes. However, even if I got a 25% return on that $4400 (probably unlikely) that's $1100. That would be great, but I sleep easy at night knowing I don't have any non mortgage debt payments and minimal monthly costs.

I know I'm not going to convince you that leasing isn't a good choice and you're not going to convince me that it is. I read your profile and it seems like you're a hardworking, hard charging younger guy like myself. I have a lot of respect for people like that as it seems many people our age don't want to work. Keep up the good work and good luck.

@Account Closed  great post. I enjoy these conversations as it makes everyone really think. It also shows people that there are many ways to look at a scenario depending on risk tolerance levels. 

I will say that I am like you in that I dislike auto debt and will do what I can to avoid it (i.e. cash for a used car and run it into the ground). However not everyone is like us, and not everyone can swing the purchase price. The whole purpose of my post was to make people think about short vs. long-term scenarios. Depending on your particular situation, and when you need cash, one method may make more sense than the other. 

The $4,400 was purely me making up numbers as I went along, but assuming you did in fact save $4,400 in year one, that is still an amount you shouldn't ignore as a small time investor or business owner. It provides you with options. My point here was that leasing puts more money in your pocket in the short-term, and if that's what you need, then leasing may be a viable option for you. I agree that the majority of the population would spend it mindlessly (and disappointingly), however I like to think that people here on BP aren't going to be in that category. Could be wrong.

You are right about dealers not requiring a down payment. They do want to decrease your "cost to get in" as much as possible to incentivise you to purchase. However, as I am sure you know, this leads to higher monthly payments. You do keep money in your pocket on the front end, but you end up paying for it, and if you aren't careful, you can really pay for it. But since my whole premise was about keeping cash in one's pocket, you are right in that this may not be a valid point.

Standard mileage vs. actual expenses depends on your car's economics. It's too complex and p"car-by-car" to simply say one method is better than the other. If you use the standard mileage deduction (56 cents for 2014) then you cannot claim depreciation. 

Great conversation, I really enjoy these in-depth posts. Hopefully we can help someone see both sides. Thanks for the kind comments as well. I hope to see more from you in the future!

Medium logo blackBrandon Hall CPA, The Real Estate CPA | http://www.therealestatecpa.com | Podcast Guest on Show #196

Lease is a bad idea.  

Reason I posted here was to see which way is better in terms of tax purposes. My current situation is my wife wants to change cars every 3-4 years so our comparison is buy and sell/trade-in every 3 years vs lease every 3 years. She also wants a luxury car (i.e. lexus/infiniti). If you figure the cost is the same either way is there one method that is better in terms of reducing tax liability?

If you need a new car (wife wants) and cash flow is the issue then use a heloc and pay down the loan equal to the actual depreciation. Buy a car that doesn't depreciate as fast (Honda Accord or Toyota Camry) and trade as you see fit. You can depreciate  the car for the % used in business.

I bought a classic car and pay interest only on a heloc (car doesn't depreciate) and don't have "dead equity".

Why would anyone pay $8000 for a used car?  That is something a renter would do.  Well actually most are even worse and will lease something for some ungodly payment like $300/month.  Go look around and pick up a work truck for a two to three thousand and invest on.  I will admit I was tempted by a Jag for $4000 but came to my senses and realized I had better uses for the money that would make me more money.

@Peter Fokas  

@Bryan N.  

If you have your own business like me (real estate agent/full time developer). According to my accountant (you should ask your own accountant too).

If I drive a car 100% business (lease, I can fully deduct the lease payment and milage (depends on the car, the more expensive the less % can deduct)

If I drive a car at 99% business or lesser, I should own the car.

Sometimes its really not horrible at all leasing a car.

I also have connection that will buy any bmws that is one year old too so it saved me on my lease.

Originally posted by @Paul Ewing :

Why would anyone pay $8000 for a used car?  That is something a renter would do.  Well actually most are even worse and will lease something for some ungodly payment like $300/month.  Go look around and pick up a work truck for a two to three thousand and invest on.  I will admit I was tempted by a Jag for $4000 but came to my senses and realized I had better uses for the money that would make me more money.

 Paul:

I paid $1000 many years ago for a VW Westfalia which last year was appraised at almost 15K.  So it really depends on what you are buying ;-)

Medium greenapartmenthires 1024x1024Roy N., Louer Louer Ltd. | 1.506.471.4126

We buy our trucks/SUV's etc under sect. 179. 

Our first one was a 100% $45,000 write off against income. The last one maxed out the paltry 2013 $25,000 limitation. We have done this with 4 working SUV's over the last 10 years. (But now we own a farm & the tax write-offs are amazing).

However, your wife's predilection for Luxury vehicles every 3-4 years would negate some of the sect. 179 tax advantage. 

Given the 3-4 year maximum hold, (in my opinion), leasing would make the most sense esp since most of the high end vehicles usually include excellent warranties, the cost of all servicing & loaners. They also have a very comfortable waiting lounge with complimentary latte's & bagels. Just make sure you have Gap insurance & coverage for any & all damages/wear & tear no matter how minor.  An associate just got nailed $1200 for a golf ball dent in the hood of his Lexus which they graciously added into his next lease.

Last summer we did see a 2010 Lexus 460 with a piece of drywall strapped on the roof racks so you could definitely do the Home Depot runs in style.

This post has been removed.

A point to the discussion I've not yet read:

The marketing/ image benefit to a Real Estate Investor/ Agent who leases a new vehicle every 2-3 years.

Looks better and facilitates deals, no?

I thought this was a real estate forum..... If you were asking if should buy or rent a house, then I can understand...

BP moderators should look into this to avoid clustering and distractions....

Originally posted by @Ndy Onyido :

I thought this was a real estate forum..... If you were asking if should buy or rent a house, then I can understand...

BP moderators should look into this to avoid clustering and distractions....

Ndy:  

I disagree.  While the question is not about the purchase and sale of real estate, it is a legitimate business question in the context of running a real estate related business, and is located in an appropriate forum.

Medium greenapartmenthires 1024x1024Roy N., Louer Louer Ltd. | 1.506.471.4126

@Roy N.

You are entitled to your opinion, but I insist its inappropriate in this forum.

Additionally, some leasing companies will not allow the business use of a leased vehicle.  Disclosure is key.

This is a very legitimate post. I found it by searching the web for "Investors vehicle, buy or lease." Although I am looking for a Sprinter conversion van or similar to travel states in search of additional properties, this post did give me a few ideas.

1) Let's say if one buy's a new car under his/her personal name or under company name (driving for business more than 50% but some personal use too), then they can show mileage driven for business and also vehicle depreciation under expenses when filing tax return. Correct?

2) If you are not using our new car for business purpose all the time. Should it be brought under your name or under company's name? What makes more sense?

3) Again, not using the vehicle for business purpose all the time. If you are leasing a car? Should it be under your name or company's name? Also can one should full monthly lease payment as a expenses when filing tax returns?

@Pat L What type of farm? Please explain it? Because my understand is it needs to meet certain criteria to deduct lot of stuff?

Thanks!!!

I was raised to buy and not lease, but I'm really starting to question that philosophy on a vehicle that depreciates so quickly. Especially for new vehicles you loose 25% of the value driving it off the lot, then you have the expense of selling it or trading it in for a value below market. If you just need something to get you around, then buy. But if you want a new vehicle. Would consider leasing it.

Originally posted by @Seth Carlone-Hanson :

A point to the discussion I've not yet read:

The marketing/ image benefit to a Real Estate Investor/ Agent who leases a new vehicle every 2-3 years.

Looks better and facilitates deals, no?

 Not necessarily. Depends on the clientele and the market you're serving. Upper East Side, absolutely. Most of the rest of the country, just makes you look pretentious or as if you don't need the money.