Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How High-Net-Worth Families Use Aviation Depreciation Strategies
Transcript
- Lucas: So you've got a family with a hundred million in liquid assets, maybe a successful business they sold a few years ago, and now they're looking at a Gulfstream G650. The jet costs about seventy-eight million dollars new. But here's the move that a lot of wealthy families use to lower their tax bill significantly in the year they buy it: they treat that aircraft as business equipment and take accelerated depreciation. Luna: You're talking about Section 179 and bonus depreciation, right? I've heard that phrase thrown around in family office circles, but I've never really understood how it works in practice. Lucas: Exactly. Section 179 lets you deduct the entire purchase price of qualifying equipment in the year you put it into service, up to a cap. For 2026, the Section 179 limit is about one point two two million dollars. But with bonus depreciation, which is separate, you can deduct a percentage of the remaining cost above that cap. In 2026, bonus depreciation is at sixty percent under the phase-down from the Tax Cuts and Jobs Act. Luna: So on a seventy-eight-million-dollar jet, in 2026, you'd get a deduction of roughly... what, about forty-seven million dollars in year one? Lucas: Roughly, yes. Sixty percent of the cost above Section 179. But there's a crucial condition: the aircraft must be used for business more than fifty percent of the time. That's the linchpin. If you use it for personal travel more than half the time, you lose bonus depreciation entirely and have to use straight-line depreciation over five or seven years, which is a much smaller annual deduction. Luna: And the IRS is pretty aggressive on that, right? I remember a case where a wealthy couple was audited because they logged personal flights to their vacation home on a jet they claimed was a business expense. Lucas: Right. The IRS requires contemporaneous flight logs showing the business purpose of each trip. And the fifty-percent test is over the life of the asset, not just year one. So you can't buy the jet, take the big deduction in year one, and then use it mostly for personal travel in years two through seven. You'd recapture the excess depreciation as income. Luna: So what qualifies as business use? For a family that owns a portfolio of businesses, or a family office, what counts? Lucas: Flights to board meetings, property inspections, investor meetings, due diligence on acquisitions — any travel directly related to the operation of the business or portfolio. Even flights to meet with wealth advisors or attorneys for business planning can qualify. But a flight to Aspen for a ski vacation does not. And if you take a personal trip, you can't deduct that leg. Luna: Now, I've also heard that there's an alternative minimum tax issue with bonus depreciation. Can you walk us through that? Because for high earners, the AMT can claw back some of the benefit. Lucas: Yes, that's a big one. For individuals, bonus depreciation is a preference item for the alternative minimum tax. So if you're in the AMT zone — which many wealthy families are — the deduction can be partially or fully disallowed for AMT purposes. You'd still get the benefit for regular tax, but you might end up paying AMT on the amount of the deduction you took. It's a complex calculation. Luna: So in practice, a family office tax advisor would model both scenarios: regular tax and AMT, and see if the net benefit is still worth it. Lucas: Absolutely. And often it still is, because the time value of money is so powerful. A forty-seven-million-dollar deduction in year one, even if partially clawed back by AMT, means you defer a huge amount of tax for years. That cash stays in your portfolio earning returns. Luna: What about the alternative for families who don't want to own a whole jet? I'm thinking fractional ownership or charter. Lucas: That's a whole different structure. With a fractional share through a company like NetJets, you don't own the aircraft directly — you own a share in a management company that owns the fleet. So the depreciation rules don't apply in the same way. You can still deduct a portion of your usage as business expense, but you're not taking accelerated depreciation on the asset itself. Luna: And I imagine the fifty-percent business-use test still applies to those deductions too. Lucas: Exactly. For any business deduction related to aircraft, the fifty-percent test is the gatekeeper. If you fail it, your deductions are limited or eliminated. That's why family offices that own jets often set up a separate entity — an LLC or an S corp — that owns the aircraft and leases it to the family business. That can help substantiate business use. Luna: Let's talk numbers for a second. A Gulfstream G650 burns about four hundred gallons of fuel per hour. At current jet fuel prices, that's roughly one thousand two hundred dollars per hour. If you fly two hundred hours a year, you're looking at two hundred forty thousand in fuel alone, plus crew, hangar, maintenance, insurance. The total annual operating cost is about two to three million dollars. Lucas: And all of those operating costs are deductible as ordinary business expenses — fuel, crew salaries, hangar fees, maintenance, insurance, even catering. But again, subject to the business-use percentage. If the jet is used sixty percent for business and forty percent personal, you deduct sixty percent of operating costs and sixty percent of depreciation. Luna: So the key takeaway is that aircraft depreciation is a powerful tool, but it requires careful planning and rigorous record-keeping. And for most families, it only makes sense if they genuinely have enough business travel to justify the jet. Lucas: Right. And there's another consideration: the so-called 'passenger tax' or 'deadhead' rules. If you fly empty legs — repositioning flights — those count as business use because they're necessary for the business flights. But if you fly a personal round trip, only the legs with a business purpose count. So the planning gets intricate. Luna: I want to circle back to something you mentioned earlier about the phase-down. Bonus depreciation is at sixty percent in 2026, but it drops to forty percent in 2027, then twenty percent in 2028, and then zero after that unless Congress extends it. So families who are considering buying an aircraft should be aware of that sunset. Lucas: That's a crucial point. If you're thinking about buying a jet in 2026, you can capture sixty percent bonus depreciation. If you wait until 2027, it's only forty percent. That's a difference of about fifteen point six million dollars on a seventy-eight-million dollar aircraft. So the timing of the purchase is a major tax planning variable. Luna: And we should note that this applies to new aircraft only, or used as well? Lucas: Both new and used, as long as the used aircraft is 'new to you' — meaning you're the first user after the aircraft is placed in service. So if you buy a two-year-old jet that was previously used by a fractional provider, you can still take bonus depreciation on it. That's a common strategy: buy a pre-owned jet that's still relatively new, at a lower purchase price, and still get the accelerated deduction. Luna: One thing I've seen is families buying a jet through a partnership or an S corp to pass through the depreciation to individual tax returns. Does that work? Lucas: It does, yes. The depreciation flows through to the owners on their K-1s, subject to their individual AMT situation. But there's also a rule that if the aircraft is owned by a partnership and used by a partner for personal travel, the partner may have to include that as compensation income. So you have to be careful with the structure. Luna: There's also a strategy around donating the aircraft to a charitable organization after the depreciation has been taken. I've heard that mentioned in family office circles. Lucas: That's a more advanced play. You take the depreciation over the first five or seven years, then donate the aircraft to a qualified charity — often a university or hospital with an aviation program — and you get a charitable deduction for the fair market value at the time of donation. The donation deduction is not subject to the same AMT preference limitations. But the charity has to use the aircraft for its exempt purpose, not just sell it immediately. The IRS has rules around that. Luna: So to summarize, aircraft depreciation is a legitimate, powerful tax strategy for high-net-worth families, but it's not a loophole. It requires real business use, careful documentation, and sophisticated planning to navigate the AMT and the phase-down. Lucas: Exactly. And it's a topic that's very specific to this audience — most people listening won't be buying a Gulfstream anytime soon. But for those who are, or who advise families that are, understanding these rules can save millions. If you're in that position, work with a tax advisor who specializes in aviation — it's a niche within a niche. Luna: And if you're not in that position but still find these strategies interesting, there's a reason we cover them. The same principles of timing, business purpose, and asset structure apply to smaller investments too. Lucas: Absolutely. On that note, if our money conversations have helped you think about a decision differently, we want to mention something. We deliberately don't run ads on these episodes. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep the content independent and focused on what's useful, not what advertisers want us to say. Lucas: Totally. And back to aircraft — one last thought. For families that don't fly enough to justify a whole jet, but still want access, there's the option of a jet card or charter. Those don't offer the same depreciation benefits, but they also don't come with the obligations of ownership. The operating cost per hour can be higher, but the total cost is lower and you avoid the risk of a large capital commitment. Luna: So the decision really depends on flight hours, business need, and tax situation. There's no one-size-fits-all. Lucas: Right. And in the context of the broader wealth management playbook, aircraft depreciation is just one tool. But it's a good example of how tax policy can influence major capital allocation decisions. And with bonus depreciation phasing down, the window to use it at these levels is narrowing. Luna: Something to think about if you're in that market. For now, that's the takeaway.