3
$\begingroup$

Why are so many small private jets sold within few years? Hardly a year or two, with depreciation of over 1-2 million dollars?

I understand these are bought by millionaires. But everyone spends some time while making such a huge investment. I presume they decided to own the aircraft and might have tried it for a few hours before procuring one. Hence, being stupid, repenting and selling it off for the majority of the buyers.

If millions are peanuts for an owner, he would be into the bigger jets like Learjet or Gulfstream.

So, why are smaller jets with < 12 pax sold in the used market so fast? Of which many hardly have ~200 hours on them. This doesn't make any economic sense to a small millionaire.

Are there any additional benefits (e.g., tax benefits) by spinning off an airplane the next year after procuring it?

$\endgroup$
4
  • 2
    $\begingroup$ One reason might be the owner underestimated the maintenance costs and can no longer afford them. Or isn't willing to. $\endgroup$
    – PerlDuck
    Feb 23 '20 at 14:28
  • $\begingroup$ @PerlDuck, i understand this, but for a small millionaire, the initial investment itself would grab his attention and the probability of such a milionaire making such a mistake is miniscule. But Out of 250 odd planes sold in this category, almost half of them are for resale. $\endgroup$
    – user46196
    Feb 23 '20 at 14:49
  • 1
    $\begingroup$ @kris when you are periodically beset with cutting a check for $30,000 for new tires and brakes or some other repair, you will wince every time you do so, regardless of how much you make! $\endgroup$ Feb 24 '20 at 16:20
  • $\begingroup$ Re "If millions are peanuts...", that doesn't necessarily follow. If I can easily afford a 911 Porshe or a 40 ft RV, does that mean I'm going to swap the Porsche for the RV? $\endgroup$
    – jamesqf
    Feb 24 '20 at 19:02
8
$\begingroup$

In the United States, aircraft that are owned and operated by businesses are often depreciable for income tax purposes under something called the Modified Accelerated Cost Recovery System (MACRS).

This is beneficial since faster acceleration allows individuals and businesses to deduct greater amounts during the first few years of an asset's life, and relatively less later. (Emphasis mine)

But even more so, The 2017 Tax Cuts and Jobs Act provides for 100 percent bonus depreciation, allowing taxpayers immediate deduction of the cost of aircraft acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2027.

This means that perhaps if someone were to have a financial windfall (sale of a company, or a large sale of highly appreciated stock), they could purchase a rather expensive airplane, and if used for business purposes (generally at least 50%), they could offset their taxes for the entire purchase price of the aircraft in the first year!

To have an overly simplistic example: Say you had $10 million in ordinary taxable income this year. You could reduce that by purchasing a, oh let's say a (2020 List price approx) 2.6 million Cirrus Vision SF50 Jet. You'd be able to reduce your taxable income by 2.6 million and pay taxes on "just" 7.4 million. Now say at least one year later, you could sell your jet and pay depreciation recapture long-term capital gains tax (which depends on the amount of your ordinary income and is capped at 25% ... which is less than the 2020 37% top tax bracket). This would have saved you in this example 312,000 (12% of 2.6 million) in a year. Of course, I'm sure it's a little more complicated than this oversimplified example, but you can see how it might be advantageous from a tax perspective, if you have a large income where you can benefit from the 100% depreciation in the first year.

So yes, it could be a tax play. Or it could be like so many things, what you thought was fast/big before you got it, now you have it, and you start to notice faster, bigger things and want to upgrade :)

$\endgroup$
7
  • 1
    $\begingroup$ Loved your answer. Thanks for the Example. Would love to see, if there are any other reasons for such fast resale, especially if there are any concerns related to the aircraft itself. Thank you. $\endgroup$
    – user46196
    Feb 24 '20 at 8:54
  • $\begingroup$ Would request you to think and please edit/update the last two Lines. For a small millionaire, who made ~10 Mil, Him investing in a small jet itself is a significant investment and I don't expect him making such choices hastily unless he won a lottery. Yes, there will be those, who make such unwise choices. But their numbers might be 3% or 5%. But the number of resale aircraft are almost 50% of the actual market sales in a year. $\endgroup$
    – user46196
    Feb 24 '20 at 9:06
  • $\begingroup$ Pretty good understanding of the US tax code for a Canuk! :) $\endgroup$
    – FreeMan
    Feb 24 '20 at 14:08
  • $\begingroup$ @kris I'm not sure what you mean. You can apply the same depreciation to another plane. So perhaps the owner, now realizing the tax savings and how much they use the plane, wants to upgrade, and apply the same tax savings to the next plane because they made even more the following year. I don't think it would necessarily be a hasty decision, but a calculated one. $\endgroup$
    – Canuk
    Feb 24 '20 at 19:18
  • $\begingroup$ Agreed with your point sir, those who made a hasty decision would be ~3-5%. Those who upgrade would be ~10-15%. But the number of units for resale are ~60%. Unless there is a reason, people wouldnt be offloading their assets. Or, is there any other reason to offload planes so fast? $\endgroup$
    – user46196
    Feb 24 '20 at 22:46

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy