A $1 buyout lease and a fair market value (FMV) lease both let you put equipment to work without paying the full price up front, and the main difference is what happens when the term ends. With a $1 buyout lease you pay off close to the full cost over the term and then own the equipment for a dollar, while an FMV lease charges you for using the equipment and lets you return it, renew, or buy it at its market value. Which one costs less depends mostly on what the equipment will be worth to you after the last payment.
What's the difference between a $1 buyout lease and an FMV equipment lease?
A $1 buyout lease, also called a dollar-out lease or, in older accounting terms, a capital lease, is priced so your payments return the lessor's full cost plus its profit. After the last payment you pay $1 and the equipment is yours, so lessors underwrite it much like equipment financing.
A fair market value lease, often called an FMV, true or operating lease, sets payments to cover only part of the cost. The lessor expects to recover the rest, the residual, by selling or re-leasing the equipment later. At the end of the term you typically return the equipment, renew the lease, or buy it at its fair market value at that time.
| Feature | $1 buyout lease | FMV lease |
|---|---|---|
| Monthly payment | Higher, covers nearly the full cost | Lower, the lessor counts on a residual |
| End of term | You own it for $1 | Return, renew, or buy at fair market value |
| Common US tax treatment | Often treated as a purchase, with depreciation | Rent deductions, if it qualifies as a true lease |
| Likely ASC 842 classification | Finance lease | Often operating, depending on the terms |
How the monthly payment and full-term cost compare
Take a hypothetical $100,000 machine on a 60-month term. Every number is an assumption: both leases are priced at the same 9% implied rate, payments are monthly in arrears, and the FMV lessor assumes a $20,000 residual, or 20% of cost. Quotes vary by lessor, credit, equipment and term.
| Assumed terms | $1 buyout lease | FMV lease |
|---|---|---|
| Monthly payment | About $2,076 | About $1,811 |
| Total of 60 payments | About $124,550 | About $108,640 |
| End-of-term cost | $1 | $0 to return, or the FMV price to buy |
The FMV lease saves about $265 a month, roughly $15,910 over the term, so the answer turns on what the equipment is worth when the lease ends.
- Worth $8,000 at the end (assumed, fast-aging gear). After subtracting the asset's value, the $1 buyout nets out near $116,550, against $108,640 to return the FMV equipment, so the FMV lease wins by about $7,900.
- Worth $40,000 at the end (assumed, long-lived machinery). The $1 buyout nets out near $84,550. The FMV lease costs $108,640 if you return the equipment, or $148,640 in cash if you buy it for $40,000, so the buyout comes out about $24,000 ahead either way.
The breakeven in this example is an end-of-term value of about $15,900, or 16% of the original cost. The math leaves out taxes, the time value of money, fees, sales tax, insurance and maintenance, so plug in your own quotes. Our guide to the true cost of an equipment lease covers the fees that change those totals.
▦Estimate your equipment financing paymentsRun the numbers in the equipment financing estimator →▸How each lease is treated for taxes in the US and Canada
In the US, the first question is whether the IRS views your agreement as a lease or a conditional sales contract. The IRS small business FAQ on equipment payments (last reviewed September 30, 2026) says that under a lease you may deduct the payments as rent, while under a conditional sales contract you're treated as the outright purchaser and may generally recover the cost through depreciation. Its signs of a conditional sale include an option to buy at a nominal price compared with the property's value, or for a small amount compared with the total payments.
A $1 option fits that description squarely, so a $1 buyout lease will often be treated as a purchase, though the full agreement decides it. IRS Publication 946 (2025) says Section 179 property must be acquired by purchase for business use, gives a $2,560,000 Section 179 limit for tax years beginning in 2026, reduced dollar for dollar once the cost of qualifying property placed in service exceeds $4,090,000, and allows a 100% special depreciation allowance for certain qualified property acquired and placed in service after January 19, 2025. Our Section 179 guide covers how that works with financed equipment.
A true FMV lease runs the other way. Publication 946 says that if you lease property to use in your business, you generally can't depreciate its cost because you don't retain the incidents of ownership, so qualifying lease payments may be deducted as rent instead. Paying much more than fair rental value is also on the IRS list, so the FMV label alone doesn't settle the question.
In Canada, the CRA's leasing costs page (modified August 31, 2026) says you deduct the lease payments incurred in the year for property used in your business. If both parties agree, Form T2145 lets you treat the lease as a purchase, deducting the interest part of each payment and claiming capital cost allowance. The property must qualify and the total fair market value of the leased property must be more than $25,000, and the CRA notes that office furniture and vehicles often don't qualify.
What each lease does to your balance sheet
Older advice says FMV leases stay off the balance sheet, and that's largely out of date for businesses reporting under US GAAP. The FDIC's examination manual section on premises and equipment (read October 2026) summarizes the lease standard, ASC 842: lessees report a right-of-use asset and a lease liability for most finance and operating leases.
Classification still matters. A lessee classifies a lease as a finance lease when one or more of five criteria are met, including transfer of ownership by the end of the term or a purchase option the lessee is reasonably certain to exercise, which a $1 buyout lease meets almost by design. An FMV lease is more likely to be an operating lease unless, for example, the term covers the major part of the equipment's remaining economic life.
Many small businesses keep tax-basis or cash books rather than GAAP statements, and Canadian businesses may follow different standards, so ask your accountant which framework applies, especially if a loan covenant tests your leverage.
Which lease fits fast-aging equipment, and which fits machinery you'll keep?
The choice mostly comes down to obsolescence risk. FMV leases tend to fit equipment with quick refresh cycles, such as servers, laptops, point-of-sale systems and medical devices like imaging systems, which can lose value fast as newer models arrive. The lessor carries the risk that the equipment is worth little in five years, and you can hand it back and lease the current model.
$1 buyout leases tend to fit equipment you'll run for most of its useful life and that holds resale value, such as trucks and trailers, excavators, forklifts, CNC machines, farm equipment and commercial kitchen equipment. Heavy-use equipment fits too, since FMV leases often carry return-condition standards and charges for excess wear.
| Question | Points to a $1 buyout | Points to an FMV lease |
|---|---|---|
| Will you still want it when the term ends? | Yes, for years | Probably not, you'll upgrade |
| How fast does it lose value? | Slowly, with a strong resale market | Quickly, as technology moves on |
| How hard will you use it? | Heavy hours or miles | Light or predictable use |
| Is it customized or hard to resell? | Yes, so the residual is low anyway | No, it's a standard model |
| What matters most right now? | Lowest total cost of ownership | Lowest monthly payment |
Specialized equipment is where buyers often misjudge the trade-off: with little resale value, the lessor assumes a small residual, so the FMV payment barely drops and you give up ownership for little savings. To weigh leasing against borrowing, see equipment lease vs. equipment financing.
What to check in the lease contract before you sign
With an FMV lease, the end-of-term language matters as much as the payment. Check these terms before signing:
- How fair market value is set. Some contracts leave it to the lessor, while others use an independent appraisal or a price cap, and a cap protects you if you buy.
- The notice window. Many FMV leases require written notice of your end-of-term choice, often well before the final payment.
- Automatic renewal. If you miss that window, some leases renew month to month or for a longer period at the same payment.
- Return costs. Who pays to remove, pack and ship the equipment, and what counts as normal wear.
- The $1 mechanics. Confirm the option price is $1, that no other end-of-term fees apply, and how title transfers to you. Documentation fees, interim rent and payments in advance also change the totals in our example.
The cleanest way to choose is to price both structures on the same equipment. With EQ Funding, one application reaches a network of lenders that compete for your deal, so you can compare the $1 buyout and FMV quotes you receive side by side. Lenders assess your credit and repayment ability, and approval and terms vary by lender.