Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Aircraft Fractional Ownership
Transcript
- Lucas: Luna, I want to talk about something that a lot of our listeners probably see as pure luxury spending, but for ultra-wealthy families, it's often a carefully structured tax and liquidity play: fractional aircraft ownership. Luna: You mean buying a share of a private jet instead of the whole thing? I've heard the numbers — it's not cheap, but I can see how it might beat full ownership. Lucas: Exactly. Full ownership of a Gulfstream G650 runs about seventy million dollars new. But a one-eighth share through a company like NetJets or Flexjet might cost you seven to nine million, plus monthly management fees and hourly operating costs. The real magic is in the tax treatment. Luna: Okay, I'm listening. What's the tax angle? Lucas: Under IRS Section 179 and bonus depreciation rules, a new aircraft used more than fifty percent for business can be depreciated rapidly — sometimes fifty to sixty percent of the cost in the first year. So if your family office buys that eight-million-dollar share, you could potentially write off four million in year one, assuming the business-use test is met. Luna: But the IRS is strict about that business-use percentage, right? They've audited plenty of wealthy families who claimed personal flights as business. Lucas: Absolutely. You need a detailed flight log — purpose of each trip, who was on board, what business was conducted. The IRS looks at the 'disinterested third party' standard: would an unrelated business pay for that flight? If the answer is 'not really,' you're in trouble. Luna: So how do families actually structure it to stay compliant? I've read that some set up a separate LLC that owns the fractional share, and then the LLC leases time back to the family members' businesses. Lucas: That's exactly the structure I'm seeing more and more. The LLC — let's call it Aviation Holdings LLC — buys the fractional share. Then it enters into a 'dry lease' agreement with the family's operating businesses. Each business pays the LLC for flight hours at fair market rates. As long as the pricing is arm's-length and the flights are genuinely business-related, you get the deduction at the operating company level. Luna: And the LLC itself — that's where the depreciation flows through to the family office? So you get a double benefit: the operating business deducts the flight cost, and the family office gets the depreciation write-off. Lucas: Right. But you have to be careful with the passive activity loss rules. If the LLC is classified as a passive activity, the depreciation losses might be limited unless you have passive income to offset. Some family offices structure it as a 'trade or business' to avoid that cap, but then you need real substance — employees, a formal business plan, maybe even renting out unused hours to third parties. Luna: Let's talk numbers. If a family buys a one-eighth share in a G650 for eight million, and they use it sixty percent for business, what does that first-year depreciation look like? Lucas: Under current bonus depreciation rules — which phase down after 2026, by the way — you could take a sixty percent bonus depreciation on the business-use portion. So that's eight million times sixty percent equals four point eight million. Of that, sixty percent is business use, so sixty percent times four point eight is two point eight eight million of bonus depreciation in year one. Plus regular MACRS depreciation on the remaining basis. You're looking at roughly three million in total first-year depreciation. Luna: That's a huge tax shield. But what happens when they sell the share? I imagine there's depreciation recapture. Lucas: There is. When you sell the fractional share, any gain attributable to depreciation taken is recaptured as ordinary income up to twenty-five percent. So the IRS gets its money back eventually. But the time value of that deferred tax — having three million dollars of deduction today versus paying tax on recapture five years from now — is still a win, assuming the family reinvests that cash. Luna: Let's talk liquidity. One knock on fractional ownership is that the resale market isn't as liquid as, say, a publicly traded stock. If you need to exit quickly, you might take a haircut. Lucas: That's true. Most fractional providers have a guaranteed buyback program, but it's usually at a discount to fair market value — maybe ten to fifteen percent below. And you're often locked in for a minimum term, typically one to five years. But for families that plan to use the aircraft for at least a few years, that's acceptable. The liquidity trade-off is offset by the tax benefits and flexibility. Luna: I spoke with a family office manager last quarter who said they run a fleet of three G650s through a fractional structure. They calculated that the depreciation savings alone covered about forty percent of their total operating costs. Lucas: That sounds about right. And that's before you factor in that the family doesn't have to hire pilots, manage maintenance, or deal with hangarage. The fractional provider handles all of that. For a family office that values simplicity, that's a huge operational advantage. Luna: So who is this really for? Is it only for the hundred million plus net worth crowd, or can a family with, say, twenty million in investable assets justify it? Lucas: At twenty million, I'd be cautious. The annual cost to maintain a one-eighth share — management fees, fuel, crew — can run two hundred to three hundred thousand dollars a year. That's one to one point five percent of your net worth just on aircraft costs. Most financial advisors would say that's too concentrated. I think the sweet spot starts at around fifty million in liquid assets, where the tax savings and time savings genuinely move the needle. Luna: That makes sense. And if today's breakdown was useful to you, the way we keep these conversations ad-free is through listener support. If you've found value in episodes like this, you can buy us a coffee — literally — at buy me a coffee dot com slash fexingo. It helps us keep diving deep into these niche structures. Lucas: Yeah, it's a small gesture that goes a long way. We don't run ads, so listener support is what keeps this show going. Thanks to everyone who's chipped in. Luna: Alright, back to aircraft. One thing I haven't asked: what about the estate planning angle? Can the fractional share be held in a trust or passed to heirs? Lucas: Great question. Yes, the share can be owned by a trust, which is a common structure for families that want to keep the asset out of probate. You can also gift fractional interests to family members over time, using your annual gift tax exclusion. The key is to have a valuation done each year to support the gift amount, since fractional shares don't trade every day. Luna: So it's not just a consumption asset — it becomes a multi-generational wealth transfer tool. That's a perspective most people don't think about. Lucas: Exactly. And with the phase-down of bonus depreciation starting in 2027, families who are considering this structure should act before year-end 2026 to lock in the highest first-year deduction. After that, bonus drops to forty percent in 2027 and twenty percent in 2028. Luna: So there's a real clock ticking. Lucas, any final piece of advice for a family evaluating this? Lucas: Talk to a tax advisor who specializes in aviation. Don't rely on a general wealth manager for this. The rules are complex, and the IRS has a dedicated aircraft audit team. If you structure it right, the benefits are substantial. But one misstep — like mixing business and personal flights without proper documentation — can blow up the entire tax strategy. Luna: Solid advice. And a good reminder that even the most glamorous assets come with serious technical math underneath. Lucas: That's the theme of this whole show, really. Thanks for listening.