Pros & Cons of doing a leaseback | FerrariChat
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Pros & Cons of doing a leaseback

Discussion in 'Aviation Chat' started by toggie, May 10, 2009.

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  1. toggie

    toggie F1 World Champ
    Owner Silver Subscribed

    Nov 30, 2003
    19,036
    Virginia
    Full Name:
    Toggie (Ron)
    #1 toggie, May 10, 2009
    Last edited: May 10, 2009
    I'm thinking of buying a 172 with a G1000 glass cockpit and leasing it back to the flight school where I am training for my private pilot certificate.
    What are the pros and cons of doing a leaseback?

    The plane was purchased new by another student who did training for his private pilot & instrument rating (over the past 2 or 3 years).
    Now he is ready to move up to a faster airplane, so his plane is for sale.
    He leased it back since to new, to the same flight school. So, it has quite a few hours for its age, but it is still in good shape.
    I don't have the details yet (asking price, tach hours, hobbs hours, historical hours per month rented, historical cash flow, etc.).
    My plan is to meet with the flight school director and plane owner before making a buy decision or not.

    I am a "life long student pilot" with 3 attempts to get my Private Pilot certificate over the past 15 years.
    4 years ago I passed the written and had done one solo cross-country before I got too busy at work and dropped my training.

    So, I figure it will take me about 6 months to get my PP license and another 9 - 12 months to get my instrument rating.
    The idea is to use this plane for my training and take the occasional 3-day weekend trip with it.

    Assuming I get good insurance through Avemco or AOPA Insurance, what are the downside risks?

    I would set up an LLC and pay cash for the plane.
    So it should have positive cash flow from the leaseback rental money (since there will be no purchase payments for it).
    My plan is to take the Section 179 deduction write-off to offset my initial purchase in my first tax year of ownership.
    Personally, I am in the highest tax bracket due to other income, so even a full $250k Section 179 write-off could be fully beneficial to my personal tax return.
    I don't think the full $250k will apply in this situation. A new G1000 172S is $297k, so a used one with relaitvely high hours is probably half that or less.

    I did a forum search, sorry if this is a repost, but I didn't find a topic similar to this posted so far.

    Thanks for any input on this.
     
  2. solofast

    solofast Formula 3

    Oct 8, 2007
    1,773
    Indianapolis
    #2 solofast, May 10, 2009
    The tax deal is the upside, but remember that when you sell the asset if it didn’t depreciate as much as you have written it down, you are going to have to pay tax on the difference. What happens is that it is likely that all you are doing is just deferring taxes out into the year where you sell it. Bottom line is that since others are also doing it for tax reasons, you can’t charge enough to make it a going business on it’s own, so don’t do it for the money.

    When I did mine there was an Investment Tax Credit of 10% of the purchase price and that really sweetened the pot. Also I rented the airplane thru the FBO for every hour I flew, so that there was never an issue with personal use and any limits on the deductions. I got audited and EVERYTHING was allowed, didn’t have to pay a cent or get whacked by the hobby loss rule. It cost a few bucks doing that way for the FBO cut, but it turned out to be absolutely worth it. Keep good records, and expect that you might trigger an audit with a leaseback if the deductions start to get big.

    The downside is that maintenance is always higher than you expect. And with a high a use airplane you will see several 100 hr inspections per year. The airplane will get used up over time, but if you just look at it as a piece of equipment it can be ok. My airplane was a more complex airplane and it didn’t see as many hours. To me the best leaseback was one that didn’t see big hours since I didn’t really want to see my airplane get used up. So long as I got the depreciation and wrote off the maintenance and fixed costs, that was all I wanted from it. This airplane is different, it is going to see a lot of use, so I would have a hard time justifying it.

    If you are doing it for motivation then owning an airplane is one strong motivation to finish your ticket. I bought my airplane before I even started to learn and went basically straight thru to an instrument ticket with only a few months off between earning my private ticket and starting instrument training. I’m sure you will get it done if you buy the airplane. If that’s the motivation then do it, but than that I’d recommend you stay away from it.
     

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