Airplane Ownership Strategies: How does it work?

Is my airplane purchase tax deductible?

If you have a job that requires  travel, and you can demonstrate that using your personal aircraft helps save time and increases productivity, you can deduct aircraft expenses for that travel.

Beyond expenses, if you use your airplane for business you may also be able to reduce your tax liability by depreciating your airplane as you would other business equipment.

The issues surrounding depreciation are complex  but your aviation tax adviser can tell you whether you can depreciate your aircraft. While your use must be primarily for business rather than pleasure, you may be surprised which flights actually qualify as business use such as flights that include maintenance work and proficiency flights.  When combined with your actual flight to and from business locations or work, and with SIFL calculations for personal flights, often the percentage of business use is quite a bit higher than first thought.

One safe bet for some solid deductions comes from using the aircraft as a business itself. You can buy  an aircraft for the purpose of producing income. This opens a whole world of deductible items, taken on Form 1040, Schedule C, “Profit or Loss From a Business.”

Some examples would include:

  • an airplane purchased for the purpose of providing flight instruction
  • an airplane purchased for the purpose of leasing for the use of customers of a flight school
  • aerial photography company
  • contracting work such as pipeline surveillance

Remember, you must be able to to display an honest intent to show a profit.  This doesn’t necessarily mean that you must actually show a profit, but the honest intent must be evident.

The best bet is to find a CPA who is an aviation specialist.  The rules are constantly changing and compliance with the IRS as well as the FAA poses a challenge for non aviators or those who just dabble in the world of aircraft deductions.  Your money will be well spent. . . and also deductible!

How do I utilize a 1031 Exchange to avoid recapture tax?

1031 exchange to avoid recaptureAssume an airplane owner has owned his airplane for 6 years and over that time has fully depreciated the plane and enjoyed the tax savings over those years. He’d like to sell his airplane, but knows that if he sells it he’ll need to pay back the tax on the proceeds that he receives from the sale. How might his tax situation look if he used the proceeds from the sale for another plane in a 1031 exchange?

As you can see in the comparison below, the investor who exchanges can obtain considerably higher investment returns from deferring the payment of capital gain taxes. The current low rates for financing provide a unique opportunity for new plane purchasers to lock-in excellent loan terms. Sellers should explore the possibility of exchanging before closing on the sale of their airplane.

SALE (CASH OUT) and repurchase1031 EXCHANGE (REINVEST)
Cessna 182 Sale200000$200,000 to reinvest
Taxes Owed95000$0 (no taxes owed in the current tax year)
Net Income to Invest$105,000 (proceeds less taxes owed) $200,000 (entire amount of proceeds received)
Time RestrictionsNoneYes, 45 days to identify replacement property
Maximum of 180 days to close on replacement property
Replacement Asset BasisBasis equals purchase priceOnly partial basis for new depreciation
Basis equals purchase price minus deferred gain

It is applicable whenever an airplane owner intends to SELL a business airplane and plans to BUY another “like-kind” property (business airplane) within 180 calendar days following the closing of the relinquished airplane.

Critical to any exchange is a competent and experienced Qualified Intermediary. (You cannot “touch” the proceeds of your sold airplane directly nor can a related party such as your CPA, attorney, aircraft dealer, etc.)

A Qualified Intermediary (“QI”) is a person who enters into a written agreement with the taxpayer (the “Exchange Agreement”) under which the QI:

• Acquires the relinquished property from the taxpayer;
• Transfers the relinquished property;
• Acquires the replacement property;
• Transfers the replacement property to the taxpayer.
The 1031 exchange is employed by most aircraft owners when they move up to newer equipment, is not terribly complicated, but must be done correctly. Talk to your tax planner before selling your plane to determine if you can benefit from this tax provision.