Welcome to the second of our two-part series on buying a car. In part one, we covered purchasing a car, briefly touched on leasing, and some of the pitfalls that can come with it. Today, we’ll discuss some strategies and exceptions that can make leasing worthwhile.
Generally speaking, leasing a car in Texas is not a great idea. Here’s why: In Texas, you pay a 6.25% sales tax on the full value of the car. Unlike some states, you don’t pay local sales tax—only the 6.25%. But the problem lies in how this tax is applied.
In most states, sales tax is calculated based on the value of the car during the lease term, not the full value of the car. For example, if you lease a car for three years, you’re taxed only on the difference between the car’s initial value and its residual value (the estimated value at the end of the lease).
That’s not the case in Texas. Here, sales tax is applied to the full value of the car, making leasing much less attractive. However, there’s an exception: the single-pay lease.
A single-pay lease wasn’t designed with individual consumers in mind—it’s primarily for businesses that need fleet vehicles. However, individuals can benefit from it too. Here’s how it works: instead of paying monthly lease payments, you pay the total lease amount upfront for the selected term (two, three, or four years). While this typically includes a 1% fee, you avoid paying sales tax on the lease. This can be an incredible deal.
You could theoretically lease a car for eight years using consecutive single-pay leases, but there’s an even better strategy, in my opinion. With a single-pay lease, you get what I call the “ultimate warranty.”
If you’ve ever owned—or known someone who owned—a complete lemon, you know how frustrating and costly it can be. But imagine this: you opt for a two-year single-pay lease on a car with a lower residual value. If you love the car at the end of the lease, you can buy it outright and pay sales tax only on the remaining value, not the full price of the car.
Now, here’s where it gets interesting: Let’s say you have a three-year lease. If something goes wrong with the car two and a half years in, you can simply return it at the end of the lease. The problem becomes the dealer’s, not yours. You don’t have to deal with trying to sell a car with issues. In addition to skipping a significant portion of the sales tax, you’ve effectively gained a world-class backup warranty.
I’ve used this strategy several times, and it’s a fantastic deal. However, there’s a catch: not all dealerships will offer single-pay leases. Japanese car dealers, for instance, often don’t bother because they don’t get much demand for it. European and luxury car dealers, on the other hand, are almost always open to it. One place you won’t find single-pay leases? Tesla. Ask me how I know…
This strategy also helps mitigate the steep early depreciation seen in some vehicles, especially European cars. These cars tend to lose significant value in the first three years. With a single-pay lease, you avoid paying sales tax on that depreciation. If you still want the car after the lease, you can purchase it and pay sales tax on the lower residual value. This is one of those rare scenarios where even if the car loses value, you come out ahead.
If you have questions about advanced leasing strategies, especially in Texas, feel free to reach out. We wish you the best of success in all your financial endeavors. Thank you.
Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.
