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Capital lease
Also called finance lease, dollar buyout lease, $1 buyout lease.
An equipment lease that functions as a purchase on instalments, where the lessee ends up owning the asset for a nominal amount and carries it on the balance sheet.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
The label describes economic substance, not paperwork. If the arrangement transfers ownership at the end, contains a bargain purchase option, runs for most of the asset's useful life, or has payments worth substantially all of its value, it is a purchase dressed as a lease. Under current US accounting standards this is called a finance lease, and the older term capital lease persists in the market and in older documents.
The practical marker in equipment finance is the end-of-term option. A dollar-out or 1 purchase option lease is a capital lease: you own the machine at the end for a token payment. A fair market value lease is an operating lease: you return it, renew, or buy it at whatever it is then worth. A 10 percent purchase option sits between and is priced accordingly.
Accounting and tax treatment diverge, which is where owners get confused. Under ASC 842 essentially all leases now appear on the balance sheet as a right-of-use asset and a lease liability, so being on the balance sheet no longer distinguishes them. For tax, the IRS looks at substance to decide whether you are the owner claiming depreciation, potentially including a Section 179 deduction whose limits are indexed annually, or a lessee deducting rent.
Many providers avoid the question by using an equipment finance agreement instead, which is straightforwardly a secured loan with a lien on the equipment and no lease fiction at all.
Where this one catches people
Fair market value leases are quoted with the lowest payment and are the most expensive way to end up owning the asset. At term end you either hand back equipment you have paid for several times over, or buy it at a value the lessor determines, and some agreements add automatic renewal periods and return conditions, including packing, freight and refurbishment costs, if you do not give written notice inside a narrow window.
Worked through
A 60,000 machine on a 60-month dollar-out lease at 1,250 a month costs 75,000 plus the 1 buyout, and you own it. The same machine on an FMV lease at 1,050 a month costs 63,000 over the term, then a purchase at fair market value, or a return, or an automatic renewal if the notice window is missed.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Capital lease — common questions
What does capital lease mean?
An equipment lease that functions as a purchase on instalments, where the lessee ends up owning the asset for a nominal amount and carries it on the balance sheet.
Where does capital lease catch people out?
Fair market value leases are quoted with the lowest payment and are the most expensive way to end up owning the asset. At term end you either hand back equipment you have paid for several times over, or buy it at a value the lessor determines, and some agreements add automatic renewal periods and return conditions, including packing, freight and refurbishment costs, if you do not give written notice inside a narrow window.
Is capital lease the same as an interest rate?
Capital lease is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does capital lease apply to?
Equipment Financing.
Is there a worked example of capital lease?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside capital lease?
Amortization, Collateral, Equipment finance agreement, Fair market value lease, Residual value.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.