FMV vs $1 Buyout Equipment Lease: Which End-of-Lease Option Costs Less?

What is a $1 buyout lease?

A $1 buyout lease (also called a capital lease, a dollar-out lease or a lease-to-own) lets you buy the equipment for one dollar when the last payment is made. Because the monthly payments cover the full cost of the equipment plus the lessor's return, the buyout is a formality.

Legally and for tax purposes, it usually works like a purchase on credit. Under UCC section 1-203, a non-cancellable lease with an option to become owner for nominal consideration creates a security interest, so you are treated as the owner with a lien on the equipment. You can normally depreciate it and may qualify for Section 179 expensing, subject to your accountant's view. For 2026 the Section 179 limit is $2,560,000 (Rev. Proc. 2025-32).

What is a fair market value (FMV) lease?

An FMV lease is a true lease. Your payments cover only part of the equipment's value; at the end you can return the equipment, renew, or buy it for its fair market value at that time. Because you are not paying off the whole price, monthly payments are lower than a $1 buyout lease on the same equipment.

The tax pattern usually flips: the lessor owns and depreciates the equipment, and you deduct the lease payments as an operating expense. On the books, most leases over 12 months are recorded on the balance sheet under ASC 842, though they may be classified differently.

The catch is the word "fair." Many forms say FMV will be "determined by Lessor in its sole discretion," or define it as the price the equipment would fetch "installed and in continued use," which is often far higher than the price you could get selling a used machine at auction.

FMV vs $1 buyout: side-by-side comparison

How do you compare the true cost?

Total everything, then compare to the cash price. For a $1 buyout: monthly payment times the number of payments, plus documentation and origination fees, plus $1. For an FMV lease: payments plus fees, plus a realistic estimate of the buyout if you plan to keep the equipment, plus return shipping, de-installation and refurbishment charges if you plan to give it back.

A worked example. A $50,000 machine is offered two ways. Option A: 60 payments of $1,050 with a $1 buyout, totalling $63,001. Option B: 60 payments of $900 with an FMV buyout, totalling $54,000 before the buyout. Option B looks $9,000 cheaper. But if you want to keep the machine and the lessor sets FMV at $12,000, Option B costs $66,000, and if you miss the notice window and the lease renews for 12 more months, it costs another $10,800. If you genuinely plan to return the machine and upgrade, Option B may well be the better deal. Run the numbers for the outcome you actually expect.

You can estimate an implied interest rate from the cash price, payment and term with any spreadsheet RATE function. If the lessor will not tell you the cash price, ask the vendor directly.

Why FMV leases are where the surprises are

FMV leases are not a trap by design, but their terms make three kinds of surprise common.

• The lessor sets the price. "FMV as determined by Lessor" gives you no way to challenge a high number. Ask for an independent appraisal if you disagree, with the cost split, or a cap stated as a percentage of original cost.
• Automatic renewal. Many FMV leases renew for 12 months, or month to month at the full payment, unless you send written notice 90 to 120 days before the end, sometimes by certified mail to a specific address. Miss it and you keep paying for equipment you may have expected to own or return.
• Return conditions. You may be required to return the equipment to a location the lessor chooses, crated and insured, in "good working order," and pay for refurbishment. These costs can be thousands of dollars for heavy equipment.

Can a lease auto-renew if I miss the notice deadline?

Usually yes, if the contract says so, and business customers get fewer statutory protections than consumers. Most state automatic renewal laws protect consumers only. There are exceptions worth knowing. New York General Obligations Law section 5-903 makes an auto-renewal clause in a contract for "service, maintenance or repair" of real or personal property unenforceable against the customer unless the provider sends written notice, by personal service or certified mail, 15 to 30 days before your cancellation deadline. Whether it reaches a pure equipment lease depends on the contract, so do not rely on it without advice.

The safer approach is to fix it in the contract: ask for renewal to be month to month rather than 12 months, for a written reminder 30 to 60 days before the notice window opens, and for notice by email to be valid. Then calendar the window the day you sign.

How do you end an FMV lease properly?

Ending an FMV lease cleanly is mostly an administrative exercise, and most of the expensive surprises come from getting one step wrong. Treat it like a project with a start date the day you sign.

• Find the notice window and its exact dates. "Not less than 90 nor more than 180 days before expiry" means notice sent too early can be as ineffective as notice sent too late.
• Check the required method: certified mail, a specific address, a specific department, or a form. Follow it exactly, and keep proof of delivery.
• State your election clearly: return, purchase or renew. If you want to buy, ask for the FMV quote in writing well before the window closes so you have time to dispute it.
• If returning, ask in writing for return instructions, the destination, and any inspection standard, and photograph the equipment before it ships.
• Keep paying until the term actually ends. A missed final payment can be treated as a default even when you have given notice.
• Ask for written confirmation that the lease has ended and that any UCC filing will be terminated.

Wording to ask for in an FMV lease

• "Fair market value means the price a willing buyer and willing seller would agree in an arm's-length sale of used equipment, not in continued use at Lessee's location."
• "If Lessee disputes the fair market value, it will be set by an independent appraiser chosen jointly, with the cost shared equally."
• A cap: "The purchase price will not exceed 15% of the original equipment cost." (Any percentage you can agree is better than none.)
• "Upon expiry, this Lease will continue month to month and Lessee may end it on 30 days' written notice."
• "Lessee may give notice of its end-of-term election by email to [address]."
• "Return location will be within 50 miles of Lessee's premises, and Lessor will pay shipping beyond that distance."

Which should you choose?

Choose a $1 buyout (or a finance agreement) if you will keep the equipment for most of its useful life, want the ownership tax treatment, and value a fixed total. Choose FMV if the equipment becomes obsolete fast, you plan to upgrade at the end of the term, and you have negotiated a fair FMV definition, a short renewal and a reasonable return clause. A 10% purchase option sits between them and is worth asking for if you are likely to keep the equipment but want a lower payment.

If you are unsure whether your contract is really a lease or a loan in disguise, our guide to equipment financing structures explains the difference. The Equipment & Vendor analyzer reads the end-of-term section, totals every payment and fee, works out the notice window dates and flags lessor-set FMV wording before you sign.