Tips on Buying Cars: Lease Trade-In Credit, lease trade, lease vehicle

Question
QUESTION: In response to a lease question asked in March 2008, you had this to say about Lease Trade-In Credit to help reduce the Sales Tax -"As for your second question in regards to the taxes.  I live and work in the state of Texas as well.  I have worked at several car dealerships in the state of Texas.  When you trade in a lease vehicle, you DO NOT get tax credits on the vehicle you are trading in. The dealership pulls what is called a TWIX which is the Texas Registration report.  Once the dealership sees that the vehicle is owned by the lease company and registered to you, we BY LAW must charge you taxes on the full selling price of the vehicle you are purchasing.  What this means is that the State Law says that the only person that is eligible to receive those tax credits is the OWNER of the vehicle, not the registrant.  You are not considered the owner of the vehicle, the lease company is.  You are considered the registrant.  Now, with that being said, the dealership is responsible for checking that out.  If you happen to catch a dealership sleeping at the wheel so to speak, they may not catch it.  For the dealership, this could and will present big problems if they ever get audited by the state.  The state would come in and make the dealership pay the difference that you did not pay, and any other customer that they did the same thing to.  Basically, whether you paid taxes on the full amount upfront when you purchased the vehicle or not, you are not the one that gets the tax credit, because on a lease you are not considered the owner.  Understand??  It is kind of confusing, and unfortunately in my opinion is not really fair, but it is the state law in Texas."  I was wondering if you could provide me with a Rule or Statute as governed by the state of Texas regarding the eligibility or ineligibility of a lease vehicle to be used for Trade-In credit on the purchase of another vehicle.  My previous understanding was that a leased vehicle could be used as Trade-In credit as long as it was being taken into the dealership's inventory (i.e: the dealership is paying off the remainder of the lease, and will then offer the vehicle for sale on their lot).  Again, I am looking for written documentation from the state of Texas that says specifically one way or another if this is allowed.  Thank you.

ANSWER: K,

Thanks for your question.  The question you are asking is completely different than the one that I answered.  You are asking if the dealership takes your vehicle in on "trade", not if you term the lease.  If you term the lease, and then buy a new vehicle, then you are not eliglbe for the tax credit on the leased vehicle.  HOWEVER, if you TRADE the vehicle in instead of turn the vehicle in, then you CAN get the tax credit, because you are fullfilling the entire contract, including the residual.  When a dealership calls to get your payoff they will get a payoff including the lease end residual, which you would not be liable for if you TERMED the vehicle.  In this aspect, you become the legal owner, because you not only are completing the lease contract, you are also fullfilling the residual value of the lease contract.  Think of it like this.  If you decided to purchase the vehicle that you are leasing at the end of the lease, you would either pay for the vehicle in full in cash, or finance the balance (the residual).  Once you finance or pay cash for the residual, and in effect keep the vehicle after the lease contract is up, then the vehicle gets re-titled.  It gets re-titled in YOUR name not the lease company's name, if you finance it, it gets titled in your name with a a lienholder listed to hold the security interest.  At that point the vehicle is NO LONGER considered a leased vehicle!  It becomes your's legally instead of you just listed as the registered owner.  The vehicle become yours solely with either a lienholder listed, or no lienholder listed.  

These are two completely seperate issues.  The previous question, the consumer was terming their lease, and correspondingly buying a new vehicle, and wanted to use the "tax credit" that was from the termed vehicle, which is not allowed by Texas State Law.  In your case you are TRADING in the vehicle including the residual value, if I understand what you are asking.  

Your understanding of Texas State Law is both right and wrong.  If you are trading in the vehicle, then the dealeship is essentially buying your leased vehicle for the full amount including the residual, and then the vehicle becomes their property to re-sale or send to the auction.  In the case of a TERMED vehicle, no one is buying the vehicle per-say.  You are fullfilling your lease committment, and choosing NOT to elect the residual balance and keeeping the vehicle.  The vehicle then becomes property of the lease company, who can do many things with it.  They can sell it back to the dealership where you termed the vehicle, or they can send the vehicle to an auction and let whoever bids the highest buy the vehicle, or do a whole host of other scenarios with that TERMED vehicle, because they are the "legal" owner of that vehicle, not you, and not the dealership.  

As far as the written statute of the law.  You can go to http://www.window.state.tx.us/taxinfo/mtr_veh/mv_su.html and find the acutual statute within those confines.  You will have to look hard though.  It is not very easily found.  As a dealer, we have a book - the old fashioned form that provides us all of the legal requirements that we must follow, which is much easier for us to research then on the website that I listed.  If you don't want to spend the time looking, then simply call your local tax assessor for the county in which you reside, and they can explain the law to you directly, or you can call the state at 800.252.1382 and ask your question there.  

Hope this answers your question.

Thanks - JB

---------- FOLLOW-UP ----------

QUESTION: JB,
I guess my real question is this:  A dealership has a customer come in wanting to trade in their vehicle on the purchase of another vehicle.  The vehicle they are currently driving and are looking to trade in is a leased vehicle.  The dealership takes all of the necessary steps to payoff the balance of the vehicle, and bring it into their inventory as a trade.  Would the customer be given Trade-In credit for that vehicle, ultimately lowering the amount of Sales Tax to be paid to the state?  No, the vehicle is not in the customer's name at the time of trade in, but the dealership is paying off the balance of the lease on the customer's behalf.  I've tried calling the State several times, including the number you provided, only to be transferred around and given other numbers to call (very frustrating!).  I have also spent many hours on their website reading, and I cannot find a clear answer anywhere.  :)  That's why I was hoping you could help.

Thank you again,
K

Answer
K,

Thanks for your follow up.  In your scenario, you are allowed the tax credit if you are TRADING the vehicle.  As long as your paperwork shows a trade in, and they are paying the full balance including the residual, and showing that as a payoff on the vehicle, then you are entitled to the trade in tax credit.  The law is a law that is not followed very often in the state, and is not monitored by the state very well.  Most dealerships will give the tax credit to people that technically don't qualify for it, and you will find that most dealerships aren't even well advised of the law themselves.  Finding the law is going to be very difficult, even online.  Getting a straight answer out of the state is going to be very difficult at best.  As a dealer we have access to people who interpret the law called the TADA.  The Texas Automobile Dealers Association.  They provide us with all of the current laws, and have legal experts, and lawyers to help us, but it only available to a registered auto dealer in the state of Texas.  

I hope this answers your question.

Thanks - JB