Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How the Ultra-Wealthy Use Private Aviation for Tax and Lifestyle
Transcript
- Lucas: Luna, I want to talk about something that's both a luxury and a tax strategy — private aviation. The ultra-wealthy don't just buy jets for convenience; they buy them as depreciating assets with very favorable tax treatment. Luna: I've heard that owning a plane can actually save you money on taxes if done right. But the numbers have to be huge, right? Lucas: They are. But let's start with a specific example. A brand-new Gulfstream G650 runs around sixty-five million dollars. Under Section 179 of the tax code, a business can deduct up to one point two two million dollars of that in the first year. Plus bonus depreciation, which can be as high as eighty percent for new equipment. So in year one, you could write off over fifty million dollars against business income. Luna: Wait — so if you're a high-earning business owner, that could wipe out a huge tax bill. But the IRS doesn't let you just buy a jet and call it a business expense, do they? Lucas: No, they don't. And that's the key. The aircraft has to be used for business at least fifty-one percent of the time. Most wealthy families structure ownership through an LLC or a corporation that actually needs the plane — maybe a holding company with multiple businesses. Then they track every flight hour. Personal use is still allowed, but it's treated as a fringe benefit, and the owner has to report imputed income. Luna: So you can take the family to Aspen for the weekend, but you pay tax on that portion. Still, the overall savings can be massive. Lucas: Exactly. And if you're buying a pre-owned jet, the depreciation schedule changes. A five-year-old Hawker 800XP, for example, might cost around four million dollars. You can still use bonus depreciation, but the percentages are lower. The real play is to buy new, maximize the first-year write-off, and then sell after five to seven years before major maintenance hits. Luna: That sounds like a strategy a family office would coordinate. Do they typically own the jet outright, or is fractional ownership more common? Lucas: Both. Fractional ownership with companies like NetJets or Flexjet is popular for families that fly less than two hundred hours per year. You buy a share — say one-sixteenth of a Gulfstream — and that gives you guaranteed access. The tax treatment is similar: you can deduct the business-use portion of your management fees and depreciation. But you lose some control over scheduling and aircraft type. Luna: And what about the operating costs? I've heard it's not just the purchase price — you have crew, hangar, insurance, fuel. Lucas: Absolutely. For a Gulfstream G650, annual fixed costs run about two to three million dollars — that's pilots, maintenance reserves, hangar, insurance. Variable costs are around five thousand dollars per flight hour just for fuel. So a family flying two hundred hours a year is looking at total annual costs of roughly four to five million dollars. But if that's deductible against business income at a forty percent tax rate, the after-tax cost drops to about three million. Luna: Still a lot, but for someone with a fifty-million-dollar annual income, it's a rounding error. And you get the convenience of flying on your schedule. Lucas: Right. And there's another layer: estate planning. Some families put the aircraft in a trust or a family limited partnership. That way, the jet can be passed to heirs with reduced estate tax exposure, especially if the value depreciates over time. The IRS allows a valuation discount for lack of marketability and minority interest. So a plane worth ten million on paper might be valued at seven million for estate tax purposes. Luna: That's clever. But we should also mention the alternative: chartering. If you fly fewer than fifty hours a year, it's almost always cheaper to just charter. No capital outlay, no depreciation risk, no crew costs. Lucas: True. But the tax deduction is minimal with charter — you can write off the flights as a business expense, but you lose the big depreciation benefit. So it's a trade-off. The ultra-wealthy who own jets are typically flying over one hundred hours a year and have a business structure that justifies it. Luna: I've also heard about 'dry lease' arrangements where a family's LLC leases the plane back to the owner's company. That can create income for the LLC and allow for further deductions. Lucas: Yes, that's a common structure. The LLC owns the jet, leases it to the operating business at fair market rate, and the business deducts the lease payments. The LLC then uses that income to pay for maintenance and depreciation. It's a way to shift income around within the family's entities. But the IRS has strict rules on related-party leases — you have to document everything. Luna: Speaking of documentation, I recall a case where a wealthy family was audited because they couldn't prove business usage. They had logs but no itineraries. The IRS disallowed over ten million in deductions. Lucas: Yeah, that's a cautionary tale. The IRS has a dedicated team for aircraft audits. They look at flight logs, crew schedules, passenger manifests. If you claim eighty percent business use but half the flights are to vacation destinations, you're going to have a problem. The best practices are: keep a digital logbook, have a written aviation policy, and use a third-party management company to handle compliance. Luna: And what about international flights? Do the tax rules change? Lucas: They do. For flights between the U.S. and, say, Europe, the IRS allows a deduction for the full cost if the primary purpose is business. But if you mix business with personal, you have to allocate. Also, some countries have VAT or import duties on aircraft. Wealthy families often register their jets in the U.S. to avoid those, but if they base the plane abroad, they may face local taxes. Luna: It sounds like a full-time job managing the tax and operational side. That's why many families hire an aviation manager or use a firm like Wing Aviation or Jet Support Services. Lucas: Exactly. And the cost of that management is deductible too. So the net effect is that private aviation becomes a tax-efficient asset when structured properly. But it's not a tax shelter for everyone. You need significant business income and a genuine business purpose. Luna: And you need to be comfortable with the lifestyle cost. Even after tax savings, you're still spending millions a year. But for the ultra-wealthy, that's often worth it for the flexibility and privacy. Lucas: Before we get deeper into the numbers, I want to mention something. If you find value in these conversations about how wealth really works, consider supporting the show. It keeps us ad-free and lets us dive into niche topics like this. You can do that at buy me a coffee dot com slash fexingo. No pressure, but every bit helps us keep going. Luna: Yeah, and we appreciate everyone who listens. It's a small way to keep the podcast independent. Lucas: Alright, back to private aviation. Let's talk about the actual depreciation schedules. Under the Modified Accelerated Cost Recovery System, a new aircraft is depreciated over seven years. But with bonus depreciation, you can take a huge chunk in year one. For 2026, bonus depreciation is still at eighty percent for new assets, but it's set to phase down to sixty percent in 2027. So there's a bit of urgency for families considering a purchase. Luna: That's a big incentive to buy now. I've heard some wealthy families are accelerating their purchases this year to lock in the higher deduction. Lucas: Yes, and that's driving demand for pre-owned aircraft too, because new delivery slots are backed up. A pre-owned jet that's less than five years old can still qualify for bonus depreciation if it's new to the owner. So there's a secondary market frenzy. Luna: What about the alternative minimum tax? Does that affect these deductions? Lucas: It used to, but the Tax Cuts and Jobs Act of 2017 effectively repealed the corporate AMT and raised the exemption for individuals. So for most wealthy families, AMT isn't a barrier. However, if they have large state and local tax deductions, they might still hit the individual AMT. But aircraft depreciation is generally safe. Luna: Good to know. Let's talk about a real-world example. I read about a family office that bought a fleet of three Phenom 300 jets for their various business entities. They structured each jet under a separate LLC to isolate liability and maximize deductions. Lucas: That's a common approach. Each LLC can claim its own depreciation, and if one entity has more income, it can lease the jet to another. It's a bit like a mini fractional ownership within the family. The key is that each LLC has a business purpose — maybe one serves the real estate arm, another the investment portfolio. Luna: And the costs? A Phenom 300 is around nine million new. With eighty percent bonus depreciation, that's a seven-point-two-million write-off in year one. If the family is in the top tax bracket, that saves about two-point-nine million in federal taxes alone. Lucas: Exactly. And over the seven-year depreciation life, total deductions can exceed the purchase price due to the time value of money. It's a powerful wealth management tool. But it requires discipline — you have to track every flight, every passenger, and every business purpose. Luna: I think our listeners would appreciate a summary of the key steps if they're considering this. What's the checklist? Lucas: First, assess your annual flight hours. If under fifty, charter. If fifty to two hundred, consider fractional. If over two hundred, buy. Second, set up an LLC or corporation with a clear business purpose. Third, get an aviation tax attorney to structure the purchase and lease. Fourth, implement a flight logging system. Fifth, work with a management company for compliance. And sixth, plan for maintenance and exit strategy. Luna: That's a solid framework. And of course, always run the numbers with your own tax advisor. The rules change, and what works for one family might not work for another. Lucas: Absolutely. Private aviation is a luxury, but with the right structure, it can also be a smart financial move. The ultra-wealthy have been doing this for decades, and the tax code is designed to encourage business investment in capital equipment. A jet is just a very expensive piece of equipment. Luna: And it beats flying commercial. I think that's the ultimate takeaway: you can have your Gulfstream and deduct it too. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to our listeners. We'll be back next week with another episode on wealth management.