Can You Avoid Sales Tax When Buying Out Your Lease?

Considering buying out your lease? Don’t forget to include fees and taxes when thinking about how much it will cost you. You’ll usually have to pay sales tax on a lease buyout since you’ll be paying to purchase the car. But there are a few exceptions, like if you live in a state where sales taxes aren’t collected or you can qualify for an exemption. Sales taxes may add hundreds or thousands of dollars to the price of a lease buyout, so it’s important to know what to expect.

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Learn more about whether you can avoid sales tax on a lease buyout and how it works.

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Key takeaways

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• If your state collects sales tax, you’ll most likely need to pay it when you buy out your lease.
• If you live in one of the five states that do not charge sales taxes, you may be able to avoid it. 
• There are exemptions, such as for military service or Native American tribal membership, that could help you avoid sales tax in some states that do collect it.

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Do you pay sales tax on lease buyouts?

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Whether you’ll pay sales tax on a lease buyout varies by state, but most states do charge sales tax. In some states, you’re charged sales tax on your lease, and that tax is included in your monthly payment. When you’re ready to buy out the lease, you’ll pay sales tax on the residual value, which is the remaining value of the vehicle when the lease expires. In other words, you likely won’t owe sales tax on the original price of the car, just the residual value remaining. If you know your vehicle’s residual value and your state sales tax rate, you can multiply them to see what you may owe on taxes.

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How do you avoid sales tax on a lease buyout?

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Paying sales tax is often unavoidable. However, there are a few specific ways you may be able to avoid sales tax on your lease buyout.

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States without sales tax

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The following five states do not collect statewide sales tax on purchases:

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• Alaska
• Delaware
• Montana
• New Hampshire
• Oregon

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Note that while Alaska doesn’t collect statewide sales taxes, you could still owe if you live in a municipality that does. Juneau, for example, levies a 5% sales tax.

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Tax exemptions for lease buyouts

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You may qualify for a legal sales tax exemption or reduction in specific cases, such as:

• Military service: Some states waive sales tax for veterans and active duty service members, although requirements vary.
• Native American tribal membership: In some states, members of specific Indian nations or tribes are exempt from sales taxes. You may need to provide ID and fill out a form.
• Family member transfer: Vehicle sales between qualifying family members may be exempt from sales taxes in some states.

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Calculate your lease buyout sales tax and other costs

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While you’re figuring out your sales tax on a lease buyout, don’t forget to account for other costs that come with buying your leased car. Here’s how to calculate the sum of what you’ll owe, including sales tax:

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• Sales tax: Find your state’s sales tax rate. For example, in Texas, it’s 6.25%. Multiply that by the residual value to find the amount of tax owed. Note that some portion of your taxes may be included in your lease payments already. And if you buy out your lease early, you may owe tax on the remaining payments.
• Registration fees: You’ll need to transfer the title from the leasing company into your name, which could carry fees in your state. Include these in your calculations.
• Lease fees: Read your lease agreement to determine what you’ll pay for various lease buyout fees, such as a purchase option fee, early termination fee, or processing fee. On the plus side, you’ll probably avoid other charges such as the disposition fee or mileage overage fee.

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Finance your lease buyout with RefiJet

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When you finance your lease buyout, you can often roll fees and taxes into your loan so there’s less you need to pay up front. Plus, using an auto loan for your lease buyout means you can find a monthly payment that works for your budget and keep the same vehicle you’ve been driving. 

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Request a fast online quote from RefiJet to see lease buyout offers from multiple lenders. Compare your options and choose the right loan for your situation.

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FAQs

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Here are some of the most commonly asked questions about avoiding sales tax on a lease buyout.

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How is sales tax calculated on a lease buyout?

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Although it can vary slightly by state, here’s the general formula: take the residual value of the vehicle and multiply it by your state’s sales tax rate. If your residual value is $20,000 and the tax rate is 6.25%, you would owe $1,250 in sales tax.

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How can I avoid lease buyout fees?

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Since sales tax is pretty much unavoidable, you can try to save money on your lease buyout in other ways. Avoid the early termination fee by waiting until the lease ends, for example. Or, try negotiating with the dealership about other charges, like documentation fees.  

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Which states allow tax-free lease buyouts?

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Delaware, Montana, New Hampshire and Oregon do not have statewide sales tax, so you can avoid that charge in those states. Alaska doesn’t have statewide sales tax, either, although you might have to pay municipal sales tax, depending on where you live.

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Is there a tax advantage to buying out a lease through a dealer vs. a private sale?

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If you buy out your lease, you’ll typically pay sales tax on the residual value of the car. When buying a car through a private sale, you’ll pay sales tax on the entire purchase amount. Just remember that your lease payments most likely included a portion of the sales tax already.

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Does financing a lease buyout affect sales tax?

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Whether you finance your lease buyout won’t affect the total amount of sales tax you’ll pay, but it could help you manage the cost. Many lenders will let you roll taxes into your loan, so you can pay monthly instead of all at once.

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