Lease or own a car? Gifting money from a reverse mortgage

Q: We are retired and have a 2003 Cadillac Seville and a 2000 Toyota 4 Runner (both paid for).

When it comes time to purchase a new car, is it cheaper to lease or buy an auto? I suppose the best thing to do would be to buy a used car. However, I would really appreciate an answer to the above question — just in case we decide on a new car.

A: It is usually better to purchase than lease. There are several reasons for this.

• First, leasing commits you to operating cars in their early years of maximum depreciation.

Since depreciation is the single largest cost of operating a car (by far), it means you'll never get to have years of low depreciation costs.

• Second, leasing commits you to operating cars for relatively short periods of time. So you will be making repeated sales-tax payments as you move from car to car.

• Third, leasing commits you to having a significant interest cost built into the operating costs of the car.

You can understand this by checking a regular exercise on the cost of car ownership done by AAA: (www.aaaexchange.com/Assets/Files/200948913570.DrivingCosts2009.pdf).

By purchasing a car new (or a recent model used car), you can drive it long enough to reduce the average depreciation and have zero interest expenses because you've owned it long enough to have the loan paid off.

Basically, you'll have the lowest cost of transportation by owning a car for a long time.

Doing that has gotten easier as cars have been built to higher standards of durability — 100,000 miles used to be an old car, but it isn't today.

Are there any exceptions to this? Yes, but they are rare. There have been periods where some luxury-car manufacturers have offered lease deals that would be lower than the cost of ownership for the period of the lease.

Q: I received money from a reverse mortgage and made a gift of $13,000 each to my son and daughter-in-law.

What are the tax implications for them and for me? The reverse mortgage money is tax-free, but how should I report this gift, if at all?

A: For this year the annual gift exclusion per recipient is $13,000, up from $12,000 in 2008.

So your gifts didn't trigger any reduction in the estate-tax exemption.

It has no impact on your eventual estate tax and the money has no tax burden for your son and daughter-in-law.

In other words, there is nothing for you to report.

By the way, don't worry about the fact that the money came from a reverse mortgage. It's your money from the equity in your house.

Questions: scott@scottburns.com