Buy out lease and sell to Carvana/Vroom-Tax implications

the5rivers

Hi trying to find some info on an AFS lease buyout and the tax implications if I sell to a third party dealer like Carvana. I'm in Indiana.

My payoff from AFS includes a line item that says payoff tax, so if I buy it out (cash), once I receive the title from AFS and then sell it to Carvana, do I have to pay sales tax or use tax?

I intend on selling it immediately once I receive the title.

Any advice or info would be greatly appreciated! Thanks in advance.

stickguy

is AFS Acura financial service? Or some other A (Audi?)

when I sold me Acura to Carvana last year (1 year into a lease) they were able to buy it out directly from Acura finance. I did discover at the time (since the payoff number seemed high) that they included sales tax to me in the figure listed on my statement. So when Carvana got the payoff amount, it did not include that (a nice surprise to me since my check from Carvana was even bigger than I expected).

I know that recently more finance companies have stopped allowing 3rd party dealers to buy out leases directly. Is this why you are buying it yourself then turning it around to Carvana? certainly going to add a fair amount of time to the process. And you will have to pay the tax to them before you get the title (you can't do it yourself afterward).

not sure where you are, but I believe some states will give you the sales tax back if you sell it to a dealer within a certain short period. I just watched an Alex on Autos video where he walked through his experience with Vroom, where he bought our a lease and sold to Vroom as soon as he got the title. He was in California and because it was a short enough period, the state refunded his sales tax paid. So definitely something to check on in your state.

the5rivers

Thanks for the comment. Sorry AFS is Audi financial. I mentioned that I am in Indiana and know about the Cali 10 day rule to avoid double taxation. That's unique to Cali and don't think it exists in other states.

Audi gives fair market value to third party dealers like Carvana Vroom etc., so that would most likely eat into my equity from them, which is what I am trying to avoid.

If I buy out from Audi with cash, I pay tax on the remaining lease payments and the title comes to me. I am just trying to figure out if I would have to pay tax when I sell to Carvana and don't know how that would work if they are just cutting me a check.

Thanks for your time.

Michaell

the5rivers said:

Thanks for the comment. Sorry AFS is Audi financial. I mentioned that I am in Indiana and know about the Cali 10 day rule to avoid double taxation. That's unique to Cali and don't think it exists in other states.

Audi gives fair market value to third party dealers like Carvana Vroom etc., so that would most likely eat into my equity from them, which is what I am trying to avoid.

If I buy out from Audi with cash, I pay tax on the remaining lease payments and the title comes to me. I am just trying to figure out if I would have to pay tax when I sell to Carvana and don't know how that would work if they are just cutting me a check.

Thanks for your time.

Why would you pay tax when you sell a car you own?

the5rivers

@Michaell said:
Why would you pay tax when you sell a car you own?

This is what I'm trying to figure out and I've read about mixed results online. From what I've read online, I've seen different comments about being double taxed, where you pay sales tax on the lease buyout and then when you sell it to a third party there's tax involved again. This is what I'm unclear on.

I assume since I'm paying cash, the title comes to me directly and I sell to Carvana and transfer title and they would pay the tax or whoever buys from them.

stickguy

I misunderstood that part. I have never heard of being taxed when selling a car. Once you buy it, you own it, so you don't pay tax to sell.

but I am a little confused still. If you are buying it, you would have to give AFS the buyout amount, and pay tax on all of it. Basically like buying at the end of the lease for the residual, where you just pay sales tax like on any other car you buy. If you did not pay tax on it, I can see you paying sales tax on remaining payments too, but I think of the buyout before lease end as a reset of the residual so IMO you would pay sales tax on the full amount you are sending to AFS (so a big number).

but you are correct that you only pay tax when buying, not selling (and dealers avoid paying tax at all since they are an intermediary).

in any case, whatever tax AFS collects to hand you the title should be it.

the5rivers

@stickguy said:
I misunderstood that part. I have never heard of being taxed when selling a car. Once you buy it, you own it, so you don't pay tax to sell.

but I am a little confused still. If you are buying it, you would have to give AFS the buyout amount, and pay tax on all of it. Basically like buying at the end of the lease for the residual, where you just pay sales tax like on any other car you buy. If you did not pay tax on it, I can see you paying sales tax on remaining payments too, but I think of the buyout before lease end as a reset of the residual so IMO you would pay sales tax on the full amount you are sending to AFS (so a big number).

but you are correct that you only pay tax when buying, not selling (and dealers avoid paying tax at all since they are an intermediary).

in any case, whatever tax AFS collects to hand you the title should be it.

No problem sorry I wasn't clear earlier. So I've been paying tax monthly in my lease payment, and what tax is remaining is what would be paid if I completed the lease.

My payoff quote from Audi:

Payoff Quote Details

Residual Value $36,176

Residual/Payoff Tax $3043.74

Remaining Future Payments $9034.24

Lease Charge Rebate $-1728.19

Payoff Amount $46,525.79

My assumption is I'm paying the sales tax in the line item listed as "payoff tax" and that should be the only tax I pay.

stickguy

that seems to be a fair assumption, yes. so as long as Carvana is giving you more than $46,525 you come out ahead.

kyfdx

Typically, a third party like Carvana or Carmax buys the car directly from the bank, and you don't purchase it. Noting that you say the third party has a different buyout amount than your residual, I'd give them a chance to see what their buyout number is, before deciding to purchase the vehicle (and pay sales tax), before re-selling it to them. The number may not be what you think it is.

Also, given the amount of sales tax (7%), you may find it isn't worth doing the multiple transactions. You also have the possibility of the value dropping while you wait for the title work.

But, you are correct. If you buy out the lease first, you'll have to pay sales tax, before then selling it to another party.

the5rivers

@kyfdx said:
Typically, a third party like Carvana or Carmax buys the car directly from the bank, and you don't purchase it. Noting that you say the third party has a different buyout amount than your residual, I'd give them a chance to see what their buyout number is, before deciding to purchase the vehicle (and pay sales tax), before re-selling it to them. The number may not be what you think it is.

Also, given the amount of sales tax (7%), you may find it isn't worth doing the multiple transactions. You also have the possibility of the value dropping while you wait for the title work.

But, you are correct. If you buy out the lease first, you'll have to pay sales tax, before then selling it to another party.

Hi thanks for your response. Based on other data points that I've read on LH, AFS quotes FMV to third party dealers and that number will most certainly be much higher than my payoff, decreasing the amount of equity I could possibly receive.

I currently have quotes that are 8k and 9k higher than my payoff which is why it seems to make more sense for me to buy the car directly and then sell to a third party dealer, which is why I am curious about the tax implications. Yes the value could change and that is something I'd have to consider.

If AFS sends me a title that still has their name but they signed it over to me, and a third party dealer won't accept it that way, then I'd have to go to my DMV to get the title reissued and I assume at this point I might have to pay tax again.

I'm just very confused on tax implications! Most straightforward process is letting the third party dealer buy it out, no tax involved, but my equity will be much less if not close to zero because of the FMV quote.

If I buy it out and sell directly and don't have to have the title reissued that would be most optimal. Otherwise to your point, I'd pay tax on the payoff and then potentially again if I have to get a new title.

stickguy

If you pay tax to AFS and get title released, you would just be getting updated title at DMV. Should not be any more tax due.

the5rivers

stickguy said:

If you pay tax to AFS and get title released, you would just be getting updated title at DMV. Should not be any more tax due.

Yes this is what I’m starting to see now. I’ve paid tax, and if I need to get an updated title, I’d only pay the fees associated with that but not sales tax again.

Thanks for your help. I appreciate it.

kyfdx

the5rivers said:

stickguy said:

If you pay tax to AFS and get title released, you would just be getting updated title at DMV. Should not be any more tax due.

Yes this is what I’m starting to see now. I’ve paid tax, and if I need to get an updated title, I’d only pay the fees associated with that but not sales tax again.

Thanks for your help. I appreciate it.

I wouldn't assume your data points are correct, without giving Carmax the opportunity to check.

the5rivers

kyfdx said:

the5rivers said:

stickguy said:

If you pay tax to AFS and get title released, you would just be getting updated title at DMV. Should not be any more tax due.

Yes this is what I’m starting to see now. I’ve paid tax, and if I need to get an updated title, I’d only pay the fees associated with that but not sales tax again.

Thanks for your help. I appreciate it.

I wouldn't assume your data points are correct, without giving Carmax the opportunity to check.

Can you elaborate more please? If Carvana/Vroom buy it by paying whatever AFS quotes them, then yes, there would be no tax involved for me.

If I buy it out and pay the tax which is in the payoff amount, I don't believe I would have to pay tax again. If I do, this is what I don't quite understand.

kyfdx

@the5rivers

One more item: Vroom wouldn't buyout your lease, in any event. They stopped buying leased vehicles.

the5rivers said:

kyfdx said:

the5rivers said:

stickguy said:

If you pay tax to AFS and get title released, you would just be getting updated title at DMV. Should not be any more tax due.

Yes this is what I’m starting to see now. I’ve paid tax, and if I need to get an updated title, I’d only pay the fees associated with that but not sales tax again.

Thanks for your help. I appreciate it.

I wouldn't assume your data points are correct, without giving Carmax the opportunity to check.

Can you elaborate more please? If Carvana/Vroom buy it by paying whatever AFS quotes them, then yes, there would be no tax involved for me.

If I buy it out and pay the tax which is in the payoff amount, I don't believe I would have to pay tax again. If I do, this is what I don't quite understand.

Sorry, I quoted the wrong post.

My point: Don't depend on other people telling you that Carmax/Carvana will be paying market value to buyout the lease, directly. Give them a chance to call for the payoff themselves, and see what you might clear.

Vroom won't buy a leased car, at this time, anyway. You'd have to buy it out to sell to them.

the5rivers

kyfdx said:

@the5rivers

One more item: Vroom wouldn't buyout your lease, in any event. They stopped buying leased vehicles.

the5rivers said:

kyfdx said:

the5rivers said:

stickguy said:

If you pay tax to AFS and get title released, you would just be getting updated title at DMV. Should not be any more tax due.

Yes this is what I’m starting to see now. I’ve paid tax, and if I need to get an updated title, I’d only pay the fees associated with that but not sales tax again.

Thanks for your help. I appreciate it.

I wouldn't assume your data points are correct, without giving Carmax the opportunity to check.

Can you elaborate more please? If Carvana/Vroom buy it by paying whatever AFS quotes them, then yes, there would be no tax involved for me.

If I buy it out and pay the tax which is in the payoff amount, I don't believe I would have to pay tax again. If I do, this is what I don't quite understand.

Sorry, I quoted the wrong post.

My point: Don't depend on other people telling you that Carmax/Carvana will be paying market value to buyout the lease, directly. Give them a chance to call for the payoff themselves, and see what you might clear.

Vroom won't buy a leased car, at this time, anyway. You'd have to buy it out to sell to them.

Yes, sorry about the misunderstanding about Vroom as I know they stopped buying leases. My assumption was I would buy it out first and then sell to them.

Yup I plan on having them call AFS and see what they get as a FMV quote.

Thank you for your help!