Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How the Ultra-Wealthy Use Aircraft Fractional Ownership for Tax Efficiency
Transcript
- Lucas: So there's a tax strategy that flies under the radar — literally. I'm talking about fractional ownership of private aircraft. Luna: Fractional jet ownership. I know the concept from NetJets and the like, but what makes it a tax play? Lucas: Good question. The core mechanism is accelerated depreciation. Under the Tax Cuts and Jobs Act, bonus depreciation at 100 percent was in effect through 2022, and it phased down gradually. For 2026, it's at 80 percent for new assets placed in service this year. Luna: So buying a share in a jet lets you depreciate most of that cost quickly, even if you only fly a few hundred hours a year? Lucas: Exactly. But the IRS imposes a 'business use' test. For the depreciation deduction to hold up, at least 50 percent of the aircraft's total use must be for qualified business purposes — not commuting to a vacation home. Personal use is fine for the remainder, but that threshold matters. Luna: And how does fractional ownership differ from whole ownership for that test? I'd imagine the structure changes the math. Lucas: It does. With a fractional share, you typically buy from a provider like NetJets or Flexjet. You get a guaranteed number of hours per year — say 100 hours on a one-sixteenth share of a Gulfstream G650. The cost might be around $5 million for the share, plus monthly management fees and hourly operating costs. Luna: Five million for a fraction of a jet. That's still a big number. But the depreciation on that five million can offset other income? Lucas: Potentially, yes. Under Section 179 and bonus depreciation, you can deduct a significant chunk in the first year. Let's say the share is $5 million. With 80 percent bonus depreciation in 2026, you could take $4 million in year one, subject to the business-use percentage and any limits. Then the remaining basis depreciates over the next five years. Luna: But wait — fractional shares have a different ownership structure. The provider typically holds the certificate, and you own an undivided interest in a specific aircraft or fleet. Does that affect the depreciation eligibility? Lucas: It does. The IRS has ruled that fractional owners are considered owners for tax purposes, not lessees, as long as the agreement meets certain criteria — like the owner bears the risk of loss and shares in any gain on sale. That's key for claiming depreciation deductions. Luna: So the tax strategy is real. But I've heard stories of wealthy families getting audited over this. What are the common pitfalls? Lucas: The biggest pitfall is failing the business-use test. If the IRS determines that more than 50 percent of your flights are personal — say you fly to your Aspen house eight times a year and only make two business trips — the depreciation gets recaptured. Plus penalties and interest. Luna: So you need meticulous logs. Not just flight hours, but the purpose of each trip. Lucas: Right. And that's where fractional providers help. They offer detailed flight records, but the owner still needs to document the business purpose. Another pitfall is the entertainment disallowance. Under tax law, you can't deduct entertainment expenses. So if you take a client to a golf tournament using the jet, that flight might not be deductible. Luna: But what about flying to a board meeting? That's clearly business. Or to inspect a manufacturing plant? That's deductible. Lucas: Yes, those are solid. The nuance is that commuting from your home to your regular office is considered personal, even if you're going to work. So if your fractional jet takes you from your primary residence to corporate headquarters, the IRS may challenge that as personal travel unless you can show a compelling business reason for using the jet over commercial. Luna: Interesting. So the tax benefit is real, but it requires discipline. What's a concrete example of how a family might use this strategy? Lucas: Let's say a multigenerational family office — the Smith family — decides to allocate $50 million to a diversified aviation program. They buy fractional shares across three aircraft: a large cabin jet for international trips, a midsize for domestic, and a turboprop for short hops. The total cost of shares is $15 million. Luna: And they fly about 200 hours per year per share, with 60 percent business use? How does the depreciation flow? Lucas: If 60 percent of the total flight hours are business, then 60 percent of the depreciation is deductible. Assume $15 million total shares, with $12 million eligible for bonus depreciation after 80 percent bonus. That's $9.6 million in year one, but only the business-use portion — $5.76 million — actually offsets taxable income. Over five years, assuming no change in use, they might save around $1.8 million in federal taxes at a 37 percent bracket. Luna: That's real money. But there are also ongoing costs — management fees, fuel, crew, hangar. Those are deductible too, right? Lucas: Yes, all the operating expenses are deductible proportionally to business use. The management fee, hourly operating costs, even the capital improvements. But you have to be careful with the FAA rules. Fractional ownership programs operate under Part 91 Subpart K, which is different from the charter rules under Part 135. That affects crew requirements and safety standards, but also the tax characterization. Luna: I've heard that some families use fractional ownership as a way to avoid the 'luxury tax' on personal jets. Is that still a factor? Lucas: The luxury tax is essentially the IRS's ability to disallow excessive deductions on assets with personal use. But fractional ownership, with its clear business-use tracking, actually makes it easier to justify the deduction than a wholly owned jet where personal travel is harder to separate. Luna: Let's talk numbers. What's the break-even on a fractional share versus chartering every flight? I imagine the tax benefit tilts the scale. Lucas: A study by a wealth management firm I saw estimated that for a family flying 150 hours per year, fractional ownership can be 20 to 30 percent cheaper than charter on a per-hour basis, even before tax deductions. Add the depreciation benefit, and the net present value of owning a fractional share over ten years could be positive compared to chartering. Luna: But what about the liquidity risk? You can sell a fractional share, but the market is thin. If you need to exit quickly, you might take a hit. Lucas: That's true. Most providers guarantee a buyback after a certain period, but at a discount. NetJets, for example, offers a five-year buyback at around 85 percent of the original share value, subject to market conditions. So it's not a liquid asset. But for a family with a long time horizon, that's acceptable. Luna: One more angle: the estate planning benefit. If the fractional share is held in a trust or a family limited partnership, it can avoid probate and provide some asset protection. Lucas: Exactly. The aircraft share can be split among family members for their business use, and the depreciation can be allocated to those with high taxable income. It's a multi-generational tool. Luna: And if our conversations around wealth strategy have helped you think about a decision differently, we want to mention that listener support is what keeps this show ad-free. If you'd like to help, you can find us at buy me a coffee dot com slash fexingo. No pressure at all — just know it's appreciated. Lucas: Yeah, we're grateful for every bit of support. It lets us keep diving into these niche strategies without any sponsor influence. Luna: Back to the jet — there's also the issue of sales tax. Some states exempt fractional aircraft purchases from sales tax if the owner uses the jet for interstate commerce more than 50 percent of the time. That can save another half million on a $5 million share. Lucas: That's a huge point. Delaware, Oregon, and a few other states have no sales tax, but the aircraft's 'home base' matters. If you base the jet in a state with high sales tax, you might owe use tax. Many families set up a Delaware LLC to hold the share and keep the aircraft in a hangar in a tax-friendly state. Luna: But the IRS can recharacterize that as a sham if the jet is actually used primarily at the family's primary residence. Substance over form. Lucas: Right, so the planning has to be real. You need actual hangar space, crew based in that state, and a genuine business nexus. It's not a paper trick. Luna: So for the ultra-wealthy, fractional jet ownership is more than a convenience — it's a multi-layered tax strategy. Depreciation, business expense deductibility, sales tax avoidance, and estate planning all wrapped into one asset. Lucas: Exactly. And the key takeaway for wealth advisors is that it's not for everyone. You need enough income to absorb the depreciation, a genuine business need for frequent travel, and the discipline to document every flight. But when structured right, it's one of the most tax-efficient ways to own a private jet. Luna: I'm curious — do you think the phase-down of bonus depreciation will change the calculus for families considering this in 2027 or 2028? Lucas: It will reduce the upfront benefit. Bonus depreciation drops to 60 percent in 2027, then 40 percent in 2028, then 20 percent in 2029, and zero after that unless Congress extends it. So the cost of capital will matter more. But even with straight-line depreciation over five years, the deductions are still valuable. It just shifts the tax savings later. Luna: And if interest rates stay high, the net present value of those future deductions is lower. So the window for maximizing this strategy might be narrowing. Lucas: Exactly. That's why we're seeing a lot of families accelerating their fractional purchases this year. They want to lock in the 80 percent bonus while it's still available. Luna: Good episode. I'll never look at a fractional jet ad the same way. Lucas: Yeah, it's a reminder that for the ultra-wealthy, every purchase has a tax angle.