YOUR TAXES : PART THREE: INVESTING, SAVING, SPENDING : Reform leaves bumpy road for taxpayers in market for a new car : There’s no clear choice on whether to lease or buy, but either option is going to cost more
Tax revision has changed the equation for buying versus leasing a car. Unfortunately, it hasn’t made the decision any easier.
The new law, because it eliminates sales tax deductions and phases out the consumer interest writeoff, makes buying a new car more expensive in after-tax dollars. But other provisions of the revised tax law raise the price of leasing a car as well.
In the end, accountants say, the advantages and disadvantages of leasing remain essentially unchanged. For most non-business consumers, it’s cheaper initially but more expensive in the long run.
Commenting on recent changes in tax laws affecting automobile leasing, Sherman Oaks accountant Keith A. Glucksman said: “When it’s all said and done, more was said than done.
“The change in the tax law as it pertains to leasing should have no influence on one’s decision to lease or finance an automobile.”
That decision should be based on an individual’s tax bracket, how he plans to use the car and what other uses he might have for the money that would be used for a down payment, Glucksman said.
Those promoting leasing, however, say that while the new tax law makes it more expensive either to buy or lease a new car, the combined effects of the law’s changes make leasing more enticing than before.
The new law eliminates the deduction for sales tax and phases out the interest deduction over the next four years, making the purchase of a car more expensive. That’s why we saw the flurry of car advertising and car buying in December as auto makers urged consumers to take advantage of the disappearing benefits of the old law.
But leasing companies, too, are finding their costs rising under the new law and are passing on their higher costs to their customers. The new tax law eliminates the leasing firms’ investment tax credit and strictly limits the size and rate of allowable depreciation on automobiles. The depreciation allowance for cars has been capped at $16,000 over five years to eliminate the unlimited depreciation that had become a taxpayer subsidy for the purchase of Lincolns, limousines and top-of-the-line imports.
Both provisions--as well as the fact that leasing companies, like individuals, can no longer deduct sales taxes--add to the costs of leasing a car.
“Our general opinion is that although neither alternative is as attractive as they were before the law changed, leasing is now more attractive (than buying),” said Bill Niemi, sales manager at Mercedes-Benz Hollywood. “The elimination of the sales tax writeoff and reduction of the interest writeoff virtually eliminate any advantages of a purchase. Leasing becomes more attractive as an alternative.”
Leasing is particularly important to a Mercedes dealership because of the high cost of the cars, Niemi noted. The cheapest Mercedes now sells for about $25,000, and several models cost more than $50,000. The high down payment and the monthly payments on a conventional bank loan for such a car are prohibitive for most car buyers, with payments often approaching $1,000 a month.
Leasing, however, offers a cheaper way into these cars. Up-front costs are minimal and monthly payments are hundreds of dollars less.
One Los Angeles Mercedes dealership, for example, offers a five-year lease on a $40,250 Mercedes 300D Turbodiesel with monthly payments of $400. Over the life of the lease, including a $4,628 down payment, the customer pays $30,187. However, if at the end of the lease period he wants to buy the car, he still owes $19,320, the so-called residual payment.
Thus, the total cost of the car is about $49,500.
By contrast, under a five-year, 10% conventional loan with an equivalent down payment, the monthly payments would be $757, for a total cost of $50,040.
The roughly equal figures can be deceiving, however. The lease customer who wants to buy the car must make a lump-sum payment of nearly $20,000 at the end of the lease period. If he finances that payment, the cost of the car goes up several thousand dollars because of interest charges. If he pays cash, he forfeits the interest income or other investment gains from his $20,000.
The car buyer, on the other hand, can lower his costs by shopping around for a cheaper loan, borrowing for a shorter period or putting more money down on the car, thus lowering his interest charges.
“Better than 50% of the cars we deal go out on leases,” Niemi said. “And of those, nearly 70% are business leases. The person brings the car into his business and writes it down as a depreciable asset.”
Niemi noted that most people who lease cars, especially for business use, simply turn in the keys and walk away at the end of the lease period.
This method is fine for people who own their own businesses or are self-employed professionals such as doctors and accountants and can write off the full lease payment as a business expense. But for the average consumer, the benefits are not so clear-cut.
“We’re still in transition on the tax bill. It’s hard to say in 1987 what will be the optimal choice for the consumer,” said Chuck Newcomer, a spokesman for General Motors Acceptance Corp., the auto maker’s finance arm, which handles billions of dollars a year in both leases and traditional loans.
“You can say that those individuals who are tax-driven, more sensitive to tax issues and who have not itemized deductions in the past very likely will find leasing to be more attractive,” Newcomer said. He mentioned non-itemizers because they have not previously taken advantage of the sales tax and interest deductions.
Newcomer added: “Here’s a second point. As the tax bill goes into its full phase, we probably won’t see a dramatic change in the number of people leasing as opposed to buying. But people who do it will be different than before, depending on how the tax bill impacts you individually. That’s true of fleet buyers as well. Companies who used to lease a fleet may now find it more advantageous to purchase, depending on their tax situation.”
Newcomer said that while the popularity of leasing has grown dramatically in the past five years, 90% of the cars financed by GMAC still go out the door on purchases rather than leases.
He said the temptation to lease a higher-priced car is greater than on an average car selling for $12,000 to $15,000.
“Everybody is more apt to lease a $40,000 item that depreciates,” Newcomer said. “You have an opportunity to put less down.”
Roy Fogel, a vice president at Century Federal Savings, said many of his lease customers are young professionals and families who want a nicer car than they could afford to buy outright.
“It doesn’t matter if it’s a Nissan or a Mercedes,” Fogel said. “Young yuppie types who can’t afford to buy a house, even though they have a high income, they’ll lease a luxury car because they’re not putting out a lot of money going in. It’s an advantage to family people, too. They’re not laying out the capital, so they can take the money and go on vacation and still have the joy of a new car.”
Fogel then repeated the lease manager’s favorite dictum: “If it appreciates, buy it. If it depreciates, lease it.”
Accountants and car dealers caution that the decision to buy or lease is never that simple. It depends on the cost of the car, the terms of the loan or lease, the percentage of use that can be attributed to business, the individual’s tax bracket, how much you are able or willing to pay down, what other profitable opportunities you might have for your capital, and how much it’s worth to you to be able to walk away from a car with 50,000 miles that is beginning to need repairs.
Mark Miller, general manager at Miller Nissan/Mitsubishi in Van Nuys, offers this advice to shoppers considering leasing a car: Be aware that insurance premiums on a leased car are generally higher than on a car that is purchased; ask whether it is possible to cancel a lease before the end of the lease term and how much it will cost; shop for a lease just as you would for a car you are buying--compare options, finance costs, monthly payments and total cost.
And, Miller suggests, consult with an independent financial adviser or accountant to see whether leasing or buying makes the most sense for you.
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