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The 'How to Buy, Sell & Upgrade Aircraft' AvBuyer Guides
Written by industry experts to help you make the right decision when selling, buying or upgrading your aircraft.
How to Upgrade Your Business Aircraft
By Keith Sikorsky
Whether you own a Gulfstream, Bombardier, Cessna, Dassault, or any other corporate jet, upgrading your aircraft can be a complex task. You may be under the impression that upgrading is as simple as going to a manufacturer and purchasing an aircraft in “ready for delivery” condition. While this is a possibility, the majority of all upgrade transactions involve used aircraft purchases, as opposed to the purchase of a new aircraft. If you are looking to upgrade your current business aircraft this article will help you because it highlights some of the major issues involved in the acquisition process.
A central theme underlying the acquisition process of an aircraft is that of timing. Timing plays a roll not only when you get rid of your old aircraft and buy a replacement, but also in how the acquisition is structured.
The current marketplace for used corporate aircraft reflect a large percentage of each aircraft make and model available for sale, resulting in prices for good aircraft at steep discounts from original retail pricing. Moving into August 2009, the market has stabilized for several makes and models, yet others still reflect very soft pricing.
How to Upgrade Your Aircraft:
“looking to upgrade your current business aircraft? This article highlights some of the major issues involved in the acquisition process”
Since the current marketplace is a “buyers’ market,” it is easy to locate a replacement aircraft, yet difficult to sell your current aircraft. Accordingly, if you must sell your current aircraft before purchasing the replacement, then, from a timing perspective, you should place your current aircraft for sale, many months, and even in excess of one year ahead of your anticipated date for purchase of the replacement.
In addition, the timing of the purchase of the replacement aircraft will have an effect on structuring a 1031 exchange transaction. Assuming your aircraft was used in a trade of business activity, IRC 1031 provides a mechanism to defer ordinary income recognition on the sale of your aircraft. While recognition of income may seem counterintuitive in a market where aircraft are continuing to lose value, the ordinary income results from the difference between adjusted tax basis and the sales price (net of selling costs). So, even if you purchased in aircraft in 2007, and now your aircraft is worth 30% less than you paid for it, you will still likely have ordinary income from selling the aircraft, absent conducting a 1031 exchange. These figures can be even larger if you have a bonus depreciation eligible aircraft.
Further, when structuring a 1031 exchange, you will either have a forward or reverse exchange. In a forward exchange, your current aircraft is sold prior to the acquisition of the replacement aircraft. In a reverse exchange, you acquire your replacement aircraft before the sale of your current one. If the owner wants to make sure that he always is in possession of an aircraft without gaps in ownership, a reverse exchange structure will be favorable.
From a financing perspective, a reserve structure can be problematic. In particular, if your old aircraft is financed, then you will have debt outstanding on two aircraft simultaneously. Further, the lender on the old aircraft may not be entirely comfortable with title to the old aircraft, for which the lender holds a first lien security interest, being transferred to the intermediary (to effectuate the reverse exchange).
In addition, there will be sales tax considerations associated with trading up to a new aircraft. Several states have trade-in credit statutes that, if properly structured, may allow you to pay sales tax only on the amount that the replacement aircraft price exceeds the value of your current aircraft. However, the requirements in these provisions often require that the trade occur simultaneously and that titles to both aircraft go through a “dealer.” Therefore, if a purchaser is located for the relinquished aircraft prior to receipt of title of the replacement aircraft, then it will be difficult to qualify for a trade-in credit. Advance and detailed planning is always necessary when it comes to sales taxes.
There may be consequences with your flight crew. If you are upgrading from one manufacturer to another manufacturer or from a VLJ to a heavy jet, your flight crew will need to undergo training. This training should be completed before you fly your first flight with the new aircraft. If you continue to hold onto your aircraft, will you need to figure out a place to hangar it while you are not using it. This can add to additional holding costs in addition to your newly purchased aircraft. If you are not going to hangar it, perhaps if you are on a 135 certificate you can continue to operate the old aircraft while you find a seller for it.
Though this article provides a brief discussion and highlight of some of the issues surrounding upgrading your business aircraft, it is by no means exhaustive. Careful attention should be paid to each step of the process, and one should always speak with an experienced aviation tax attorney before initiating the acquisition.
By Keith Swirsky and Brian Heisman of GKG Law
Keith Swirsky is President and Chairman of the Aviation Group and Tax Group. Partner concentrating in the area of business aircraft transactions, tax and business (transactional) representation with emphasis on federal and state taxation and federal regulation of aircraft ownership and operations, structuring and negotiating mergers, acquisitions and reorganizations, tax-free exchanges, and tax and corporate planning for the creation of aircraft operating structures.
Brian Heisman is an Associate of GKG Law concentrating in the area of business aircraft transactions, tax and business (transactional) representation, with emphasis on federal and state taxation and federal regulation of aircraft ownership and operations, structuring and negotiating mergers, acquisitions and reorganizations, tax-free exchanges, and tax and corporate planning for the creation of aircraft operating structures.
For more information please see: www.aviationtaxlawyer.com
