Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Aircraft Partnerships for Tax and Lifestyle
Transcript
- Lucas: Most people see a private jet and think, that's a fifteen million dollar toy that burns cash in the hangar. And for the average person, that's correct. But the ultra-wealthy often look at the same aircraft and see something else entirely: a tax-optimized capital asset. Luna: I've heard that private jets can be written off for business use, but it seems like the IRS would be all over that. How do families actually make the numbers work without getting audited? Lucas: The most common structure I see is an aircraft partnership. Four to six families pool capital into an LLC that's treated as a partnership for tax purposes. They buy the plane together, then allocate usage and expenses according to a written agreement. The tax magic comes from depreciation—the IRS allows accelerated depreciation under the Modified Accelerated Cost Recovery System. Luna: Quick honest thing—a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes. We don't run ads, we don't sell anything, it's just listener support. If our money conversations have helped you think about a decision differently, that link is there. Lucas: Yeah, and we really do mean it. No pressure ever, but we're grateful for the folks who keep the lights on. Now, back to aircraft partnerships—let's talk real numbers. Lucas: Take a concrete case: four families form a Delaware LLC to buy a Gulfstream G280. Purchase price, let's say fifteen million dollars. Each family contributes three point seven five million. The plane is placed in service and the LLC elects to be a partnership. Luna: So the LLC itself doesn't pay tax. All the income and deductions flow through to the partners' individual returns. Lucas: Exactly. And here's where it gets interesting. Under MACRS, a non-commercial aircraft qualifies for five-year depreciation, with bonus depreciation if the plane is new or used but placed in service in the current year. So in the first year, the partnership might deduct roughly thirty percent of the aircraft's cost—that's four and a half million dollars. Split four ways, each partner gets over a million dollars in depreciation deductions. Luna: But those deductions are subject to the passive activity loss rules under Section 469, right? If the partners aren't materially participating in a business that uses the plane, those losses are suspended. Lucas: That's the critical nuance. The IRS requires that the aircraft be used primarily for business—more than fifty percent of total flight hours must be for qualified business travel. If it's used more than fifty percent for business, the depreciation and operating expenses are deductible against the partners' active business income, not just passive income. Luna: Define 'qualified business travel.' Does a trip to a board meeting count? What about flying to a family vacation where you also check on a property? Lucas: The IRS says business travel is any flight where the primary purpose is a business activity. The partner herself must be on board. And there's a strict record-keeping requirement—you need a contemporaneous log: date, destination, purpose, names of passengers, and duration. If you take a mixed-purpose trip, say three days business and two days personal, only the business portion qualifies. And the personal portion is treated as imputed income to the partner at the standard aircraft valuation rate, which is currently about four dollars per mile. Luna: So the partnership basically has to charge the partner for personal use, or that partner reports fringe benefit income. That's a lot of paperwork. Lucas: It is, but families that do this well have a management company—often a third-party aviation management firm—that handles all the scheduling, billing, and record-keeping. The management company ensures compliance with the written agreement and the IRS rules. For a fee, typically ten to fifteen percent of operating costs, the families essentially outsource the headache. Luna: And operating costs alone on a G280 are substantial. What are we talking about annually? Lucas: Rough estimate: crew salaries, hangar, insurance, fuel, maintenance, and management fees can run eight hundred thousand to a million dollars a year, depending on flight hours. Split four ways, that's two hundred to two hundred fifty thousand per family. But if the plane is used sixty percent for business, then a portion of those expenses—and the depreciation—offset the partners' business income. In a high tax bracket, that could save each partner three hundred to four hundred thousand in taxes annually. Luna: So the net out-of-pocket after tax could be very small, maybe even negative if the depreciation is large enough. That's how a private jet becomes a wealth management tool rather than a pure expense. Lucas: Exactly. And there's another layer. Aircraft partnerships can be used for estate planning. Instead of giving cash, a wealthy parent can gift a fractional interest in the aircraft to their children. The value of the interest is discounted for lack of marketability and lack of control—typically fifteen to thirty percent. So a one-million-dollar fractional interest might only be valued at seven hundred thousand for gift tax purposes. Luna: And the children can then use the plane for their own business travel and benefit from the depreciation deductions. But they'd have to have sufficient business income to absorb those losses, right? Lucas: Right. And the children must also comply with the business-use test. If they're not running an active business, the deductions are suspended until they have passive income from the aircraft or other sources. But families often plan around this by having the children join the family enterprise or start their own ventures. Luna: I imagine the IRS scrutinizes these structures closely. What's the audit risk? Lucas: The IRS does have a team dedicated to aircraft tax shelters. The key is having a well-documented, legitimate business purpose. If the partnership's primary purpose is truly transportation for the families' business activities, and the records are clean, it's a defensible position. The danger is when families treat the airplane as a personal perk and then claim one hundred percent business use. That's flagrant. A sixty-forty split is much more credible. Luna: Are there any alternatives to the partnership structure? Could a family just buy the plane themselves and lease it to their operating company? Lucas: Some do that. But leasing brings its own complexities—like related-party lease rules under Section 280F, which can limit or defer deductions. The partnership structure is more flexible because allocations of income and deductions can be customized per partner. For example, one partner might need more depreciation in a given year and can be allocated a larger share. As long as the allocation has substantial economic effect under Section 704, it's permissible. Luna: So for ultra-wealthy families with significant travel needs and multiple business entities, the aircraft partnership can be a powerful combination of lifestyle and tax planning. But it's not for the casual flier. Lucas: Exactly. It's a strategy that requires real business activity, rigorous record-keeping, and a professional management team. But for families that fly fifty to a hundred hours a year for business, the net after-tax cost can be shockingly low. It turns a luxury into a lever. Luna: I think our listeners would love to hear a specific example of how the economics pencil out. Could you walk through a hypothetical year for that four-family G280 partnership? Lucas: Sure. Assume the plane flies four hundred hours a year, two hundred fifty of which are business. The partnership's operating costs are nine hundred thousand dollars. Depreciation in year one, with bonus, is four point five million. Total deductions: five point four million. The partnership also generates revenue? No—it's a cost-sharing arrangement, not a charter. So the partners each contribute two hundred twenty-five thousand for operating costs. But each partner gets a share of the deductions: one point three five million per partner. If a partner is in the top federal and state bracket—say forty-seven percent—the tax savings are about six hundred thirty-four thousand. So after-tax, the partner's net cash cost is actually negative: they pay two twenty-five out of pocket but save six thirty-four in taxes, for a net benefit of about four hundred thousand. Of course, that's before considering the value of the personal flights they took, which are imputed income. Luna: So in a high tax year, the partner could come out ahead on a cash-flow basis. That's the kind of math that makes private jets a non-issue for the truly wealthy. Lucas: It is. And that's why aircraft partnerships are a staple in the ultra-wealthy playbook. They convert a depreciating asset into a tax shield, and they do it within the bounds of the tax code. Luna: Well, I think our listeners have a lot to think about next time they see a Gulfstream on the tarmac. Thanks, Lucas.