Leasing vs Buying a Car Pros and Cons
So it’s time for some wheels. Should you lease or buy a car? It’s a question many have to weigh the pros and cons of. Everyone has to come to their own decision about what works best for them.
Most people buy. This according to an Experian report showing only 22.5% of all new vehicles were leased.
Making the decision between leasing and buying a car can be stressful. Is it better to have lower monthly payments, but not actually own the car? Once you own a car, is it even going to be worth anything anymore? There are many considerations to make when deciding what works best for your budget.
Let’s take a look at leasing vs. buying a car pros and cons.
What is Leasing?
Leasing a car involves essentially renting it for a set period, typically two to three years. During this time, you make monthly payments, but you don’t own the vehicle outright. Here are some advantages and disadvantages of leasing:
Pros:
- Lower Monthly Payments: One of the most enticing aspects of leasing is the lower monthly payments compared to buying. Since you’re only paying for the car’s depreciation during the lease term, rather than the entire cost of the vehicle, monthly payments are generally more affordable.
- Warranty Coverage: Leasing often means driving a brand-new car, which typically comes with a manufacturer’s warranty. This means you’ll likely spend less on maintenance and repairs during the lease term, as the warranty should cover many issues.
- Upgrade Opportunities: Leasing allows you to drive a new car more frequently, as lease terms typically last only a few years. If you enjoy having the latest features and technology, leasing might be appealing since you can upgrade to a new model at the end of your lease term.
Cons:
- Mileage Restrictions: Most lease agreements come with mileage restrictions, typically around 12,000 to 15,000 miles per year. If you exceed these limits, you’ll incur additional fees, which can quickly add up.
- No Ownership: Perhaps the most significant downside of leasing is that you never own the car. Once the lease term ends, you return the vehicle to the dealership, and you don’t have any equity to show for your payments.
- Potential Fees: Returning a leased vehicle can incur additional fees for excess wear and tear, so it’s essential to take good care of the car to avoid extra charges.
What Does It Mean To Buy a Car?
Buying a car involves purchasing the vehicle outright or financing it through a loan. You own the car and can keep it for as long as you like. Here are the pros and cons of buying:
Pros:
- Ownership: When you buy a car, it’s yours to do with as you please. You can customize it, drive it as much as you want, and keep it for as long as you like without worrying about mileage restrictions.
- Equity: Over time, as you pay off your car loan, you build equity in the vehicle. Once the loan is paid off, you own the car outright, and you can sell it or trade it in towards a new vehicle.
- No Penalties for Wear and Tear: Unlike leasing, where you can incur fees for excess wear and tear, owning a car means you’re free to use it without worrying about additional charges.
Cons:
- Higher Monthly Payments: Buying a car typically comes with higher monthly payments compared to leasing since you’re paying for the entire cost of the vehicle, not just its depreciation.
- Depreciation: Cars are notorious for depreciating in value over time, and when you buy a new car, it begins losing value the moment you drive it off the lot. While you’ll eventually build equity in the vehicle, it’s essential to consider its depreciation when making your decision.
- Maintenance Costs: As the owner of a car, you’re responsible for all maintenance and repair costs once the manufacturer’s warranty expires. This can add up over time, especially as the car ages.
Tax Breaks Available to Car Buyers
There are some potential tax breaks for car owners.
#1 Electric Vehicle (EV) Tax Credit
The Electric Vehicle (EV) tax credit is a federal incentive designed to encourage the adoption of electric vehicles by providing a financial benefit to taxpayers who purchase qualifying electric vehicles. This tax credit, also known as the Plug-In Electric Drive Vehicle Credit, is available for both individuals and businesses that purchase or lease eligible electric vehicles.
Here’s how the EV tax credit typically works:
Qualifying Vehicles:
The tax credit is available for qualifying electric vehicles, which include both plug-in hybrid electric vehicles (PHEVs) and battery electric vehicles (BEVs). Generally, eligible vehicles must meet certain criteria related to battery capacity and electric range.
Tax Credit Amount:
The amount of the tax credit varies depending on the vehicle’s battery capacity and electric range. Generally, vehicles with larger battery capacities and longer electric ranges are eligible for a higher tax credit amount.
Maximum Credit:
The maximum tax credit available for eligible electric vehicles is set by the federal government and is subject to change. As of recent updates, the maximum credit is typically capped at $7,500 per vehicle.
Phase-Out:
The EV tax credit is subject to a phase-out once a manufacturer sells a certain number of eligible vehicles. Once a manufacturer reaches the threshold of 200,000 eligible vehicles sold, the tax credit begins to phase out for vehicles sold by that manufacturer. The phase-out period lasts for a certain amount of time before the tax credit is completely phased out.
Claiming the Credit:
Taxpayers can claim the EV tax credit on their federal income tax return for the year in which they purchase or lease an eligible electric vehicle. The credit is typically claimed using IRS Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit.
Restrictions and Limitations:
It’s important to note that the EV tax credit is subject to certain restrictions and limitations. For example, taxpayers must owe federal income tax to be eligible to claim the credit, and the credit cannot exceed the taxpayer’s total tax liability for the year.
Additionally, the EV tax credit is non-refundable, meaning that if the amount of the credit exceeds the taxpayer’s tax liability, the excess credit cannot be refunded. However, unused portions of the credit can generally be carried forward to future tax years, subject to certain limitations.
State and Local Incentives:
In addition to the federal EV tax credit, many states and local governments offer their own incentives and rebates for electric vehicle purchases. These incentives vary by location and may include additional tax credits, rebates, or other benefits for electric vehicle owners.
Overall, the EV tax credit is intended to help offset the upfront cost of electric vehicles and make them more accessible to consumers, ultimately supporting the transition to cleaner, more sustainable transportation options.
#2 Tax Code 179
Tax Code Section 179 is a provision in the Internal Revenue Code (IRC) that allows businesses to deduct the full purchase price of qualifying equipment or vehicles financed or leased during the tax year. It is designed to encourage businesses to invest in themselves by providing an incentive to purchase or lease capital assets, such as vehicles, by allowing them to deduct the full cost upfront rather than depreciating the asset over time.
Here’s how it typically works:
- Qualifying Assets: Section 179 applies to a wide range of tangible personal property used in business, including vehicles, machinery, equipment, and software. However, not all assets qualify, and there are certain limitations and restrictions.
- Deduction Limit: The deduction limit under Section 179 varies from year to year, but it allows businesses to deduct up to a specified dollar amount of the cost of qualifying assets. For tax years beginning 2023, the IRS states the maximum 179 expense is $1,160,000.
- Purchase Price: Businesses can deduct the full purchase price of qualifying assets, up to the deduction limit, in the year they are placed in service. This means that businesses can potentially deduct the entire cost of a vehicle or other qualifying asset in the year it is acquired, rather than spreading the deduction out over several years through depreciation.
- Phase-Out: The deduction limit under Section 179 begins to phase out once the total cost of qualifying assets placed in service during the tax year exceeds a certain threshold.
- Eligible Businesses: Section 179 is available to businesses that purchase or lease qualifying assets for use in their trade or business. It is not available to individuals or businesses that do not use the asset for business purposes.
Cars Eligible for Section 179:
Not all vehicles qualify for the Section 179 deduction. Generally, vehicles with a gross vehicle weight rating (GVWR) of more than 6,000 pounds are eligible for the full deduction. This includes many SUVs, trucks, and vans commonly used for business purposes.
Some popular vehicles that have historically qualified for the Section 179 deduction include certain models of:
- Ford Expedition
- Chevrolet Suburban
- GMC Yukon XL
- Toyota Sequoia
- Cadillac Escalade
- Mercedes-Benz GLS-Class
- Lexus LX
- BMW X7
It’s important for businesses to consult with a tax professional or accountant to determine if a specific vehicle qualifies for the Section 179 deduction and to understand the limitations and restrictions that apply. Additionally, tax laws and regulations may change, so businesses should stay informed about any updates or changes to Section 179 that may affect their tax planning and strategy.
As always, you should consult with a tax professional to go over your options before making a final decision.
What Now?
Whether to lease or buy a car ultimately depends on your individual preferences, budget, and driving habits. Leasing offers lower monthly payments and the opportunity to drive a new car more frequently, but you never own the vehicle, and there are mileage restrictions and potential fees to consider.
Buying a car means higher monthly payments initially, but you own the vehicle outright and can keep it for as long as you like without worrying about mileage restrictions.
Consider these pros and cons carefully before making your decision, speak to a professional, and choose the option that best suits your needs and lifestyle.
