Trading In – Renting and Leasing Tangible Personal Property

Trading in property to rent or lease other property

Lessees of property can trade in other property as partial payment for property they’ll lease. Retailers can reduce the taxable sales price by a trade-in allowance. Trade-in allowances can’t reduce the taxable sales price on rentals or leases between anyone else, such as private parties.

There are three methods to apply the trade-in allowance and calculate tax due.

Option A: Subtract the trade-in allowance from the cost of the leased or rented property to reduce all monthly payments. The retailer charges tax on each payment.
Option B: Use the trade-in allowance as the initial payments for the leased or rented property until the unapplied trade-in allowance is zero. The retailer doesn’t charge tax on those payments.
Option C: A combination of these two methods.

Example to apply the three methods: Kelly of Beth's Best Parties leases a van from OK Vans for 36 months. The value of the van plus interest for 36 months is $12,000. Kelly trades in a car worth $4,000 and receives that amount from OK Vans as a trade-in allowance.

Calculate tax on the three methods described above as follows:

Option A

Reducing all monthly payments. Kelly and OK Vans use the trade-in allowance to reduce the lease value from $12,000 to $8,000. The payments are $222.22 per month for 36 months. OK Vans charges sales tax on each $222.22 payment.

Value of van	Trade-in allowance	Financed amount	Lease term in months	Payment amount subject to tax
$12,000	$4,000	$8,000	36	$222.22

Option B

Eliminating initial payments. Kelly and OK Vans apply the $4,000 trade-in allowance as full payment for the first 12 months of the lease. OK Vans doesn’t charge tax on the $0 payments. At the end of 12 months, the remaining lease value is $8,000. Kelly pays $333 per month plus tax for the final 24 months of the lease.

Value of van	Trade-in allowance	Financed amount	Lease term in months	Number of months with $0 payment	Remaining months subject to tax	Payment amount subject to tax (for remaining 24 months)
$12,000	$4,000	$12,000	36	12	24	$333.33

Option C

Combining the two methods. Kelly and OK Vans apply $3,000 of the trade-in allowance as a down payment to reduce the lease value to $9,000. The payments are $250 per month for 36 months. They apply the remaining $1,000 of the trade-in allowance to the first four monthly payments of $250. OK Vans charges tax on each $250 payment for the remaining 32 months.

Value of van	Trade-in allowance taken initially	Financed amount	Lease term in months	Number of months with $0 payment	Remaining months subject to tax	Payment amount subject to tax (for remaining 32 months)
$12,000	$3,000	$9,000	36	4	32	$250

Trading in leased property to buy other property

Lessees of property can assign the residual buyout amount of the property as a trade-in allowance on property they buy. Retailers can reduce the taxable sales price by a trade-in allowance if the residual buyout value is more than the trade-in allowance:

If the residual buyout amount of the leased property is more than the trade-in allowance the retailer offers, the taxable sales price is reduced by the difference.
If the residual buyout amount of the leased property is equal to or less than the trade-in allowance the retailer offers, the trade-in allowance doesn’t reduce the taxable sales price.

Examples Tom’s Recording Studio has been leasing a console, and wants to buy new equipment that costs $15,000. Tom wants to trade in the console that has a residual buyout amount of $10,000. Tom fiinds two retailers that will accept his leased console as a trade.

The first retailer offers a trade-in allowance of $11,000 for the console. In this situation, the console’s trade-in allowance is $1,000 more than the residual buyout amount. This reduces the taxable sales price by $1,000. The retailer charges tax on $14,000.
The second retailer offers a trade-in allowance of $9,000 for the console. In this situation, the trade-in allowance is $1,000 less than the residual buyout amount, so the trade-in doesn’t reduce the taxable sales price. The retailer charges tax on $15,000.

Note: Trade-in allowances can’t reduce the taxable sales price on rentals or leases between anyone else, such as private parties.

Leasing and renting – specific issues

See the following guides for leasing and renting information on specific issues.

Renting out or leasing out real property: “Hotels, Motels and Short-Term Rentals“
Renting out or leasing out vehicles or aircraft: