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Tax Smart Real Estate Investors Podcast
365. Can You Really Write Off a Private Jet? What Actually Works with Preston Holland
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In this episode of the Tax Smart REI Podcast, Tho…
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You're now listening to the Tax Smart REI Podcast, the number one tax podcast for real estate investors.
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Your source for.
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All things real estate, accounting and tax. Here we reveal our secrets that can save you thousands in taxes, streamline your accounting process, and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors, and current clients on what strategies they use to grow their business and how they steer clear of Uncle Sam.
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Hey everyone. Thanks for tuning in to this week's.
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Episode of the Tax Smart REI Podcast.
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Today we're joined with Preston Holland, who.
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Is president and founder of Prestige Aircraft Finance. We're going to be talking about how you can buy back your time through private aviation. We'll be talking about structuring alternatives, taxes, of course, all that good stuff. So if you ever thought about flying private or buying your own private jet, this is an episode you don't want to miss. We're going to be diving into all that in just one minute.
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You've probably never found a real estate newsletter worth reading, and that's because we hadn't created ours yet. The REI Daily is a newsletter you actually want to read whether you own one property or 100. We created this for you. Each issue delivers crucial tax saving strategies, legislative updates, as well as real estate market insights, everything you need to stay sharp and ahead of the game. Get the real estate and tax news that actually matters straight to your inbox. Subscribe to the Rai Daily newsletter today and at therealestatecpa.com subscribe. That's it for now and right back into today's episode.
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D
All right, and we're back. Preston, thank you so much for joining us today. Before we dive right in, would you be able to give our listeners just a little bit of information on your background and how you got involved in private aviation?
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B
Yeah. Thomas, Nate, it is great to be on the podcast with you guys. I really appreciate you having me on. So my journey in aviation actually began when I was about 12 years old and my dad started telling me about his flying. He flew canceled bank checks out of Atlanta. He flew bonanzas and barons long before I was born. And my mom made him hang it up when I was born. So unfortunately I never got to fly with him. But he would tell me stories about crazy takeoffs and getting stranded by ice and snowstorms and flying simulators back before simulators were what they are today. And so that really sparked the love of aviation in my life. My dad was in the real estate business, so we owned a large REMAX franchise. He was actually the original we buy ugly houses franchisee. That's like a fun fact.
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E
That's awesome.
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B
And down in Florida in the mortgage business, the title business. So, you know, really, really grew up with kind of the dream and the love of aviation. Went to college, kind of put that on the shelf and went. Ran a service business for a little while in. In East Tennessee, which totally unrelated to aviation. And a friend of mine was purchasing an aviat, and he called me and he said, hey, I need a turnaround guy. I need some help running this thing, and do you want to come help? I said, sure. Sounds like fun. And so that's how I got into the world of aviation. Kind of moved over into the finance aspect while I was there in a couple of, I think, what, three or four years ago, and then started my own firm. It'll be two years in August when I started my own firms. If you're listening in the future, in 2024, last year, we closed 31 Transact, representing about $150 million worth of aircraft. You know, primarily, you know, traditional bank debt, private equity, kind of mezzanine debt, non recourse kind of name it. We closed similar structures, did a few leases, operating leases. So, yeah, that's a little bit of my background. So I got here. I also like to post on X, which is like, what people. I got called at a party one time by a guy who owns a private jet, by the way. He goes, yeah, you guys got to follow this private Jekyll on Twitter. And I was standing next to him, and I was like, oh, hey, that's me. And he was like, oh, it is you. So, yeah, so I'm a degenerate ex poster.
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E
That's right. I'll call X Moss Eisley. For anyone that's familiar with Star wars, right? It's like the place, like Oklahoma says the place of villainy and scummery initially. But yeah, Preston, we're so pumped to have you on today, so I'm gonna have to ask you to just shake two steps back with us and be like, okay, so when it comes to the whole debt brokering process, and we'll definitely touch on your real estate background too, because I think there's some cool nuggets there that we can unpack. How do you step into the process when it comes to, like, hey, someone says, hey, I'm looking to acquire a jet. I'm looking to do, like, fractional ownership. You could, like, talk about what those terms even mean and what. How they even happens, right?
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B
Yeah, let's take, let's take like a half step back. We'll get into whole ownership. But I think the first thing that would be useful for people who say, okay, I think I want to fly private. I'm tired of dealing with American Airlines or Delta or United or whoever your preferred. Everybody's mad about Southwest seating now they're like, oh, I'm going to go fly private, right? So there's really, when you break it down, there's really four ways of flying private, right? So I'll add one fifth way, which is my friend has a private jet. That's the best way to fly private because, you know, usually you don't have to pay for it, but if you're going to be the one who's actually paying for it, there's really four types of flying private. First is charter. You may have heard part 135. That is on demand charter. Think like Uber or a taxi for private aircraft, right? You make a phone call, the aircraft comes and picks you up, takes you to your destination and then that's it. Right. So on demand charter is done typically through a large brokerage network in this industry. So you may have a charter broker who sources aircraft for you and then you fly on that aircraft. They do a lot of the logistics, the planning. If there's a mechanical issue, they recover it, things like that. But for all intents and purposes, it's a one time transaction. It's subject to 7.5% federal excise tax for those people. We're talking about tax today on the podcast. So you do pay 7.5% federal excise tax within the United States. That does not qualify if you're flying outside of the United States, but inside the United States. And it is from a per hour basis, typically the most expensive way to fly.
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But.
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But it's also the least committal, which means that you don't have to sign up for any programs, you don't have to make any deposits, things like that. So that's part 135 charter. Second, you have like a jet card or a membership. So this is wheels up, this is XO Jet, this is, you know, Magellan Jet. There's a ton of different providers of these services and those jet cards are kind of long term contracts. They're fixed rate. Typically some of them have dynamic pricing but typically they're fixed rate. So it's predictable. But you are still flying 135 charter. So you're still paying 7.5% federal excise tax. You're still flying on various aircraft, kind of a various fleet. So that's the second type. The third type is fractional ownership. So if you've had a friend say, oh, my netjets share or something like that, they are typically talking about fractional. And then last step is whole aircraft ownership. So that is, I bought an airplane. It's my airplane, not necessarily in whole ownership. You may own it with a couple of friends. So I have plenty of clients who. There's two or three people who own one aircraft together, but for all intents and purposes, you're owning the aircraft together. Now, in fractional and in whole aircraft ownership, you do not pay 7.5% federal excise tax. You pay a lot of other taxes or potentially pay a lot of other taxes when you own an aircraft, depending on what state you live in. But in those two, you don't pay federal excise tax.
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E
Okay, very cool. So basically, you either own 100% yourself, you either get a card that lets you rent other people's jets, or you get some bodies together and you go buy a jet together. Right? It's pretty much. Is it like, the best way?
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And so, yeah, fractional is a membership style where you own a part. So here's like, a little fun tidbit. If you're in real estate, you probably have a friend who flies net jets. It's just statistically likely. The QS every NetJets aircraft, and the tail number ends in Qs. And QS stands for quarter share, because that's how it started out, is you were buying a quarter share of an aircraft and you're actually buying a part of the aircraft, and then you have a fleet of aircraft. Are you guys familiar with Picasso? Have you guys heard of Pacaso, the artist?
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Maybe. But if we're not talking.
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Okay, so Picasso is like, it's a company that does fractional real estate. Same way you buy an eighth of a house with seven other people and then you get access to, like, the rest of their network. It's very similar to that concept. Picasso is like net jets of houses.
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D
Yeah, I've actually heard of that before. Now that you mentioned it, I think one of our clients ended up using it. So that was an interesting weights. Basically, you buy a fraction of the house, and you could also stay other people's houses that are within. Yeah, I know what you're talking about.
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Yeah, yeah, exactly. So similar idea. So you're buying, like, a portion that gives you an allotment of time on that aircraft type. You may not necessarily fly on your aircraft. But if you buy an eighth of a Phenom 300, you then get access to 75 or 100 hours on a Phenom 300. And it's like across the whole fleet. So your large providers for that are NetJets, Flexjet's the second largest. And then you have other companies like Airshare, Jet Out, Skyshare out in Utah, and there's a couple of others that do kind of smaller regional. But that's, that's a fractional ownership.
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E
Okay, very cool. And so that's like the basic ownership of how it works. When you, like when you're looking at jet ownership, et cetera, then how do you come into play here? So it sounds like, like you're, you're the finance guy. Right. So if somebody goes, hey, I'm ready to make this happen. Right. So how does that process work for you? Yeah.
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So typically we get introduced to a client and I would say nine times out of 10, the way we get introduced to the conversation is I called my local bank, I'm buying XYZ Aircraft. They said, I've never done an aircraft before. Or they called their local bank, or maybe not their local bank, but they called JPMorgan Chase and they said, it's not brand new, it's not $50 million. We're not really interested. Or the structure's like, not great. Yeah, that's typically where we get involved. We've got a relationship with, you know, 50 different lenders across the United States, both private, public, or, you know, private banking or also private credit. And so we have those relationships across the board. We basically put the deal together and then we take it to market to get you the best possible structure. The other thing too, when talking about structure is it's really important to structure your aircraft loan in a way that creates a win win scenario for both you and the bank. Because the bank is in the business of making money and not taking defaul. And you are in the business of making sure that you have a great whole term life of like, you want to like, owning the aircraft the whole time you own it. And if you're in a bad debt deal, it's a really bad end of term because you're either having to come out of pocket, you know, make up an LTV gap, or you're having to, you know, pay prepayment penalties or whatever. So we take it to market. We sit down with you. Oftentimes a team is involved. You know, cpa, the cfo, controller, financial advisor, banker, wife.
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Right.
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Just Kind of depends on who runs your finances. And then we put the deal together, take it to market, and then create some market efficiency and market competition. Because every bank has a specific box and a buy box in which they understand the asset, they understand the credit, and they're going to really want to put together the best structure for that transaction.
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Yeah, 100%. So with that being said, I had a good question. Are you typically working with businesses? Are you working with like high net worth individuals or is it 50, 50, like who's typically like your, your client?
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Our typical client is a high net worth individual that has a closely held operating company of some sort that is I would say last year, out of 31 transactions, I would say that that is 26 of them. So like a vast majority is something like that. Now when you're looking at the credit underwriting, it's typically you're underwriting the strength of the guy or the girl and the business is what supports that strength. So you're kind of underwriting a little bit of both. Right. You have to understand kind of the, you know, how does it work from a global cash flow standpoint. And I would say 90% of aircraft deals are personally guaranteed. That's the one thing that is like significantly different than real estate. And I have a ton of real estate clients for the reason that the bank doesn't understand how you have your structure. And we have a lot of real estate clients so we can interpret what you're doing to the bank. And personal guarantee is always a sticking point, especially for real estate people, because of kind of the history. I think one of the big differences is one, there's no MES layer in aircraft, right? You have a first lien. That's it. It's the mez layer that usually gets you in trouble. From a real estate debt stack standpoint, where in aircraft it's first lien priority. And as long as you structure the deal right, the personal guarantee should never come into effect. If you structure the deal poorly, maybe an amortization that doesn't support the aircraft and you end up upside down in it. It's the only time the personal guarantee even comes into consideration. That's part of what we help our clients understand is like, hey, yes, there's a personal guarantee and we're not going to negate the fact that that is something to be conscious of. But the reality is that as long as we structure it right and you're at 80% loan to value the entire life of your loan, you can short sell the airplane and Be okay, right? You can get out, you can have a fire sale and get out of your loan. And the personal guarantee doesn't actually trigger.
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E
Oh, that's super important. Right. Not to have that hit. I was like, I'm glad you talked about real estate there and how it's so different that basically it sounds like every deal is personally guaranteed, while with real estate, it's like you almost never see or rarely see a personally guaranteed deal.
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B
Yeah, exactly.
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D
We have a lot of people who tune into the show, they hear about the next sexy strategy and you know, you know, obviously a lot of people love flying private. Very much a status symbol of today's day and age. Everybody posts on Instagram just so we can get in front of this. What type of income or net worth does this actually start making sense for someone to actually buy their own plane?
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Yeah. So I will caveat this with. There is levels in life, okay. You do not have to be Elon Musk and you do not have to buy a Gulfstream G650 to fly private. There is a lot of different levels when you kind of think about it. And so if you, if you think about it on like a linear scale, you have kind of the bottom end of the market, like a PC12, for instance. Right. You know, most of my clients buying PC12s are worth somewhere in the ballpark. And this is including their primary operating business with a fair multiple put on it. I see a lot of PFS put a 20 times multiple on earnings. And I'm like, guys, we need to probably pare that back a little bit. They're not, you're not in software. So, you know, so, so including your operating company as a part of your whole net worth, typically you're looking between 50 and $100 million net worth when you start flying in that kind of PC 12. Now that's, you know, you own real estate. You know, typically our clients have six different things going on. Right. You know, somewhere up underneath. So you have some real estate, you have some investments, you have a primary opco, maybe you sidequest business. Right. That you've backed or kind of minority investor in. That's typically what we see. And that that number is a little bit flexible, kind of in the bottom end, I would say. I. So I ran a survey of my newsletter audience. So I write a newsletter. It's called the Private Jet Insider. You find it@prestonholland.com plug plug. But I ran a survey and it was basically like when you own a whole aircraft, it's usually you're making $10 million of net. So you're, you're kind of netting out to yourself somewhere around $10 million of income and about $100 million net worth. That is kind of a general rule of thumb and is not the, it is not the law, but it is like a good general rule of thumb. And I think that that net is like before any sort of tax strategies, right? So like think like not what you pay taxes on, but like, yeah, I'm making $10 million and I'm going to put this over here and put that over there and kind of, you know, before you're doing all of your tax planning. That's kind of a good generic number to think about. And it's really a business tool. Like what a lot of people, they have this idea in their mind that like, oh, I'm gonna buy a private jet so that I can fly my family on vacation and like do all these things. And you can do that 49% of the time to talk about tax. But as long as 51% of the time it's a business tool, it starts to make a lot of sense for these business owners to use it as a business tool.
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Hey, real quick, if you've been a longtime listener to the show, then you know, we give everything away for free from how to use the real estate professional status and the short term rental loophole to save tens of thousands of dollars on taxes to upcoming tax changes. We don't hold anything back. And the only way we would help more real estate investors is if you rate, review and share the show. It just takes 15 seconds to leave a quick rating review or share with a friend who may find this information useful on their real estate journey. That's all for now. We'll dive right back into today's episode.
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E
Yeah, and like you mentioned earlier, right, there's different other ways, so we'll get the taxes, but like different other ways to like look at acquiring a jet. Right. I think there's some other large people online who just posted about having acquired their own private jet, but they didn't do it by on their own, did it with friends in a group together. Right? Just like all the time people do in real estate, right? Like they get together and like get a partnership. Hey, we get some buddies together and do something of that nature. But getting back to the taxes, jets and purchasing jets, like Tom was saying before, is one of the sexier tax strategies out there right now. Right now. There was a post I think about a month ago, Preston, right, where someone's Talking about, hey, I'm purchasing this $5 million jet, I'm only financing 20% of it, and I'm going to write it all off against my taxes.
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B
Yeah, I'll speak to this. Most of my clients are purchasing aircraft partially because there's a tax benefit to it, because there is the 100% bonus depreciation rule.
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E
100%.
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B
And here's where there's an interesting play from the finance perspective. As long as we can get rates down, and I'm really hopeful that this year we get some rate relief because I would say for the last two years it hasn't made as much sense to finance your aircraft. But as long as rates get to a point, I'm going to say if your treasury rates get down in kind of the high twos, right, Your five year Treasuries are like in the high twos. And all of a sudden you're starting to look at effective aircraft rates somewhere between 4 and 5%. If you're putting 20% down and you do the math and you just, and you're in the 37th percent tax bracket before you start talking about state taxes. If you do the math, it's effectively a $0 transaction. And so you're just flying at operating cost and like your direct cost for the next, call it five years. Problem is recapture. Right? And no one wants to talk about recapture when they're talking about sexy business strategies. But I think that when you get into it, I'll tell you. Do you know the difference between flying private and crack cocaine?
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E
No, I don't, but I would love to hear you inform me of that.
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B
You can quit crack cocaine.
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D
Oh, so you're saying flying private's more addictive, Right?
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B
More addictive than crack.
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E
Okay.
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B
I'm taking my wife on her first experience here in about two weeks. And she was like, when do we need to be the airport? I was like, I don't know. I think we're leaving like 3:30. So like 3:25, like, you know, maybe 3:40, like it doesn't matter, like it's not leaving without us. She's like, oh, well, what do we do when we get there? I was like, well, we'll just get there and put our bags in the car and go. So it's, it really is a game changer when you're talking about return on time. And a lot of people get really hung up on the cost. And yes, it is very expensive. I am not going to negate that. Flying private is expensive, but for really, really high achieving entrepreneurs, and business owners and executives, it is the only way in which you can buy your time back. And that I think is priceless. It's a big pillar of my platform, is that it's the only way you can get more time is by flying private. And so you have to measure what is the actual return on that time. And also you can't take it when you go. At the end of the day, you want to leave a legacy and don't stretch yourself so far that you're buying a JAD or flying private and not leaving your kids an inheritance. But if you're in a financial position where that's fine, then flying private is kind of one of life's greatest luxuries, in my opinion. But I'm biased anyways. Getting back to the tax strategy, what it does is it allows for you to kind of let the bank carry the residual value, if you will, you know, sliding along the curve. And that's what makes the tax strategy a attractive. But if you're just doing it for the tax strategy and not because you have a need for flying private, you really need to be flying about 150 to 200 hours per year before the math makes sense for you to be owning your own aircraft. And that's, I mean, to put in perspective, that's a lot of hours. I mean, that's, you know, that's getting after it from, you know, that's four hours a week, taking two weeks off, right. You know, to fly 200 hours. But there's a lot of people that do that and big in real estate because it's geographically diverse and the only way that you can get to your tertiary market warehouse building is by flying private because it's the only way to be effective.
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E
Yeah. So it sounds like there's a high bar to get into to start. Right. And for a need aspect. And the reason why you're probably talking about the need is one, like financial cost, right. That's obviously number one. Two, it actually applies to the tax savings piece, right? Because if you buy a $5 million jet but you only fly at 51% for business, well, that means now you're only going to get $5 million jet. You're going to get two and a half, 2.6, whatever million dollar deduction on the back end, right. That's what's super important. And you can't play around with that like in later years, right. You can't just go, I'm going to apply 100% year one, then drop down to years too. Like we've talked about this a lot on this show from a vehicle standpoint, saying, hey, if you do that, you're going to get smacked with the recapture. Well, you're going to get smacked even bigger recapture.
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B
So let me push back on you on that point, because this is a business asset. And the way that 100% bonus depreciation is currently structured, I would say 100% of my clients take that strategy of using. As long as you maintain your 51% level.
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E
Sure. Yep.
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B
Because it's the purchase in the deduction in the first year and then after that. Again, I am not a cpa, so do not take my advice worth much. But I will tell you what I see tactically is as long as you, you take the 100% deduction in the first year and then you can deduct all other expenses at the ratio after that first year. So it is the reason why December is a crazy month for aircraft because you can just definitely use it 100% for business and take that deduction in that first year. And then, you know, your maintenance and your hangar and all of that, you take it the ratio in which you use it for business. And after that, as long as it maintains above that 51% level. That's how it's been explained to me. But I would be curious to hear where is the risk in that strategy?
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E
What you just suggested totally does work, right? I'm just saying, like, you can't just take it 100% one year and then go, hey, I'm going to check it in the park in the, in the, Leave it in the hangar and just let it rest. Right. And like, now I'm going to fly to Cabo with this thing. You can't do that. But, like, what you said, like, do. I'm doing as much business use as I can year one. And then the following year is, hey, I just got to keep this puppy above 51% business use. After that, you're good to go. Right. The issues that I see that people run into is when you've got multiple partners, right? And you go, well, I want to take it for two weeks to go to Cabo. And they go, hey, I want to go to New York. Right? I want to go to New York for a couple weeks. And so you all of a sudden, you start sharing this personally, you go, guys, nobody's flying this thing for business right now. And we got to figure out how we're going to get some business trips in. And I actually want to define what a business trip versus a Personal trip is. Right. It's a business trip. Is like going to be that you are going to. Like we talked about earlier with real estate. Maybe you live in Georgia, you're flying out to California to check investment on your warehouse or something like that. Or you have a client that lives out in California that you have to visit. Right. You have yearly meetups, et cetera, or like one of your biggest clients. Right. Basically, you got to document what you're doing and how you're doing it for the irs. And the reason I'm saying that is because the IRS released over the past three years that they are going to be strongly targeting these types of investments. Right. They have a new little check the box form on the 4562, which is where you report depreciation saying, hey, do you charter or lease any jets or own any gents? Since they should be checking the box, yes or no. And then also they released what they will look for in an audit. It is 300 pages of documentation that they're expecting to see, which. That's a lot. That's a lot. And the reason why they're doing this is because they think they can get a lot of. The IRS is always making ROI plays and they think they can win big time on the jet use. I think a lot of people are potentially abusing this and so they're going to be looking for this in the future.
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B
Yeah, no, that's a really good point. Nate, do you ever do any special aviation tax stuff? Do you set up aviation tax structures?
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E
We have set some up for clients. Just looking through and having conversations with, like, basically like, hey, how do I like we have a client who a client comes to us and says, hey, I'm going to buy a jet for my business. I need to use. Okay, great. We just talked through, like, how does it apply? What business use actually goes into it. Right. Do you have partners trying to do that type of stuff and trying to like coalesce the entire situation together?
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B
Yeah. Can I suggest to everybody who's listening that if you're going to take this strategy, first of all, welcome. It's very awesome. It's incredibly expensive, but it will change your life. Second, hire a deal Specialized aviation tax consultant, Aviationtaxconsultants.com is one of them. I am friends with a couple of the principals there. They don't want to do any of your other tax. They just want the airplane. And they create all of the structure that the IRS is looking for. They also do your state tax planning because Texas, for instance, you cannot close with the aircraft on the ground in Texas because it's not a flyaway state. But you have to close in Texarkana and then fly straight back in. And that's okay. California is very weird. Georgia's very weird. Florida's very odd. With kind of how you do your sales tax planning. They are going to make sure that you have the documentation that backs you up in an aviation audit. There's a couple of advocate tax. How can Christensen. There's a couple of really good ones that all they do is airplanes. And it's like it may cost you 30 or 40 grand to do it. But I will tell you that will save you a fortune because they're also going to be there when you get audited. If you get audited. If you get audited, they're the ones who are going to deal with the auditors on the airplane side. You're not having to pay your cpa. You're probably paying a lot more than you paid for the aircraft CPA to back up the audit or go find stuff. They do your audit logs to make sure that you're hitting your percentages and stuff like that. So just for those who are wondering how to do this, definitely get a specialized group for this.
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E
Especially on the sales tax like you're talking about the excise tax and sales tax side. There's a lot, there's probably a lot there that we're not involved with that we're involved in the real estate side for the most part. So it totally makes sense to have a conversation with people like that if you're looking at pursuing this.
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B
Yeah, for sure. No, I completely agree. I think we should also probably talk about fractional ownership because I think that that's one that. I think people have a little bit of misunderstanding of what it actually means from a tax standpoint. Whole aircraft is relatively self explanatory. The other thing actually. Sorry, one more thing. On the whole aircraft thing, if you think that you can buy a jet and charter it out and break even, unfortunately you are in it mathematically very rarely makes sense. Especially in a post Covid market. There were pockets pre Covid that you could find in arbitrage and buy something cheap enough and buy it right and get away with kind of relatively flying for free. Unfortunately, post Covid values have gone up so high that your best case scenario is covering your fixed costs and then flying at direct operating costs. But the other thing is there's tax depreciation and then there's depreciation on the asset, what can you sell it for after you've used it for 1,000 hours a year? Unfortunately, the way that the math works, you at the very best are going to make it a cash break even and maybe a little bit of a tax place sort of. But you're really not going to make, you're not going to make like 12% IRR like you think. You think about how it works with real estate. But what you have to remember is that cap rates and forced appreciation in real estate do not exist in airplanes.
- [29:07]
E
Right? Yeah, the depreciation doesn't exist on the jet. Right. So it's like owning a big fancy car and it's like a lot of times their turn is not going to be there at the end of the day. And the other thing too, I wanted to talk about. So a lot of times people say, oh, I'm going to lease from a tax strategy perspective, they say, hey, I'm going to lease back to jet. I'm going to lease it back to a charter school or a flight school or something like that. So when I'm not using it, still making me money. Right. Well, from a tax perspective, that doesn't work either. Right. That immediately gets tossed in the passive bucket. Right. So like Preston, I talked a little bit about earlier is that like there's an active in the. You guys know this when it comes to real estate, there's active and passive buckets when you're immediately leasing out something and you're not involved in the management whatsoever and it's a piece of equipment you're stuck in 469. So this applies not just to jets, heavy equipment, bulldozers, anything of that nature. Crypto mining. If you're not like if there's not. If you don't fall into one of the exceptions, right, which like average 7 days or less or average 30 days or less, something like that with special services. So that'd be like using a flight crew and stuff like that. I think there's two different lease terms, right, Preston? For that we fall into a different bucket there and that there's a lot more federal trouble I think you get in with that than even just from a tax perspective. But now you're losing your deduction that you thought you were getting up front too. So again, it's a very complex piece of tax law and so you got to make sure you understand the in and outs of it to actually achieve and get that ROI you're looking for on the front end.
- [30:26]
B
Yeah, we had seen that post on X that Was like, I bought this $300,000, you know, training aircraft. I've got a $7,000 a month triple net lease and I deducted a hundred percent of it in year one. It gets my active gains and all this stuff. And we're just like, first of all, to make a $7,000 a month triple net lease payment, you're having to fly like 200 hours a month, which means you're gonna have to have a new engine like every three years, which costs like 50 grand. So there goes a lot of your net operating profit. But also passive versus active. And he was like, no, I'm active. I'm actively managing the lease. And I'm like, I don't think that passes the sniff test. But what. I'm not a tax guy when it.
- [31:14]
D
Comes to material participation. You know, we see this all the time with clients especially, you know, we deal with, of course, a lot of it in the real estate space. But it kind of, you know, after I read Nathan's white paper on, on this exact topic, it's the same across the board business. Like there's certain things like you have to actually be involved in the operations of the underlying business or activity in order for it to work. Overseeing things or reviewing financial statements and all these things that clients try to claim like is active is not often active. So you should definitely have a conversation with your CPA in terms of active versus passive to make sure what your plans are actually going to be considered. Material participation and not just investor level activities which are explicitly explained, excluded from material participation. Or you're delegating everything to a management company.
- [31:58]
E
Right.
- [31:59]
D
We've heard this one before, property managers when it comes to real estate. But when you're delegating a lot of the activities to somebody who's gonna be managing your plane, like a charter school or something along those lines, you just have to kind of be cognizant of that. So just wanna throw out there for everybody.
- [32:12]
B
Yeah, don't delegate too much of that activity. Like, I'll give you an example. My friend owns a flight school, okay? He bought an aircraft, he owns the flight school, right? Like that's very simple. But if I bought an aircraft and he lives in Kansas and I live in Chattanooga, Tennessee and I sent the airplane over there, how am I act? There's no way that I'm actively managing that aircraft, right? Like, I'm not actively doing that at all. Even if I had it here locally. Right? There's a flight school here locally. Even if I did it here locally, I'M not booking students in it. I'm not actively, you know, I'm not, I'm not actively participating in any of the revenue and I'm not actively participating in any of the support of that revenue. I don't understand how you can argue that that's an active stance of the business. But again, I'm not a tax guy and people do some weird. The flight school is where people do some really weird stuff like that. Because if you're buying a triple net lease Charterbird for $10 million, you've got passive problems. You have passive tax problems. When you're in that bracket, you probably have enough passive income that it makes sense for you to write off a passive deduction. No problem, right. Against your passive gains at the stock market or private equity or whatever. It's these guys who are like, these guys like me who own a business and I'm like, I hate paying taxes. So I'm going to do this questionably weird. I don't have a ton of passive needs, so I can't take that passive loss and carry it forward. Those are the guys, I think, that get in trouble.
- [33:49]
E
Yeah, you're totally right. Everyone wants it to be active. Everybody wants to toss into the active bucket, which I, look, I totally get. And there can be ways to do it. It's just not as easy as like, hey, I'm just going to lease this thing, triple this thing out, call it a day, and I'm gonna get the deductions. It doesn't work. Right. Same thing with real estate. Right. So you do the same thing with a real estate apartment building. Sorry, you're gonna wind up with not a tax benefit at the end day of the, the day, which is, hey, you know, I say you're not going to have the tax benefit. You're still getting the depreciation. It's just sitting over in the passive bucket. You're going to get to use it one day, just not today. And sometimes the time value of money, it's more important there to try and capitalize on that. And maybe this is what people really try to get to. It's like, oh, I want to group it with my business. Maybe that's possible. If you're triple net leasing it, probably not going to work. Because that business, that's a rental business, that's not the same as your. If you're a doctor, even a real estate developer, sure, maybe there's a, a possibility that you can needle a thread. But there's many tax court cases that have said otherwise. And have said, hey, yeah, you can try to do that. But here's why. And here's why. Here's why. Here's why this doesn't actually work out. I've seen it be possible with some clients, but again, you're needling a haystack versus like having an overall broad strategy there.
- [34:58]
B
Yeah, but what about real estate professional status? Right? Like that's what everybody wants. They're like, I'm a real estate professional.
- [35:04]
A
Yeah.
- [35:04]
D
Unfortunately the real estate professional status does not help when you're leasing aircraft. An aircraft is not real property. It's not real estate.
- [35:11]
B
So sure it is. It's real. It's a real airplane and it is my property.
- [35:16]
E
Right, it's real. Yeah. In your estate, I guess, right? I guess we can make those connections. Yeah. Yeah.
- [35:21]
D
Unfortunately, when it comes to aircraft, if you're renting out the aircraft because it's not real property, even with the real estate professional status, that's not going to help you, which I'm sure some people are sad to hear, but it's just the reality of the situation there. If you're renting out the aircraft, unless you meet the seven day exception like Nate mentioned before or one of the other ones, it's going to be a passive rental activity. And there's no other way out. There is no real estate, there's no aviation professional status, unfortunately in that case.
- [35:45]
B
So darn. Preston would crush, Preston would crush that.
- [35:49]
E
Maybe we can make it just for Preston. We'll have to do a lot of, do a lot of lobbying to make that happen.
- [35:54]
B
We should get the National Business Aviation association to really go after that. Should be a high priority. That would actually make my membership go a lot further, I'll tell you that.
- [36:03]
E
It would. Oh, man. Tom, any got any follow up questions for Preston?
- [36:10]
D
No, I mean right now I think, I think you cleared up a lot of things that I had. You know, we talked about the tax side of things and how it's just not as simple as a quick, you know, 60 second tick tock video on writing over private jet. You do need to have, you need to be well capitalized. You need to have the ability to make a case, to have the business use, especially if you're going to be using as a tax play. So I, I think we covered a lot there. We covered. Who would typically be someone for this if you're around $10 million of income or $100 million net worth, have to watch out because a lot of people out there have, have big egos. Right. They have their Tertiary property, you know, out there that their self storage unit and they need the private jet to go there. They need it, you know, they don't have any other, any other way, but they don't have the net worth to back it up. So I don't have any other questions at this moment.
- [36:51]
B
I would say, I would say my, my note to people who don't have that for their tertiary markets, chartering for that purpose, it's still a travel expense. So although you don't get the beautiful bonus depreciation and like all that write off, if you're flying under 75 hours a year, you should be chartering anyways because if you do the math, like here's the reality, if you're going to buy an aircraft, you're going to depreciate it and you're going to fly it and you're flying under 75 hours. Your insurance, your hangar cost, your pilot costs, your subscription costs are going to eat you alive from a total cost of flying private. So if you take all your costs divided by 75, you're going to come out better chartering. Like it just statistic or fractional, statistically speaking, you will be better doing that than owning your own aircraft. Despite your tax savings. Even if you're like, oh this is a great tax play, you're still losing because you're not like using it enough. So like be chartering and that is more like 2 million net income, 20 million net worth, which is pretty achievable, right? I mean that's Wall street guys, that's mid size to smaller real estate investor, right? Where it's like you're allocating $200,000 per year of private aviation travel expense, which as long as you can write that off as travel expense or you can depreciate your fraction of the aircraft, right? If you're buying into NetJets, you can still, and you use a 51% for business, you can still depreciate that 51 or that 100% of your fraction of an aircraft. So the answer is not, oh, I'm going to fly Southwest until I can afford my own private jet. Like there's a lot of other ways to do it.
- [38:37]
D
And it's good to know because buying and owning the private jet isn't the only way to fly private. There could be more economical ways to still fly private without owning the actual jet itself. I think that's, that's an important distinction. You know, I listened to a podcast with David John, the guy from Shark Tank, and you know he had in the discussion, I think it was Cody Sanchez, about buying a private jet. And he goes, sometimes you do, I do need to fly private. But he's like, I don't own the jet myself. Just let somebody else deal with that expense. I'll just charter the aircraft when I need it. So I found that to be very interesting that someone like who you would think would have a private jet or you, you rationalize it, he's just like, sometimes it doesn't always make economic sense to do that. He said the same thing about yachts.
- [39:16]
E
By the way too.
- [39:16]
D
He's like, Jeff Bezos, worry about the yacht expense. I'll just rent the yacht when I want it.
- [39:20]
B
Yeah. I like my friend who called me, the private jet guy on Twitter. He owns a fractional with flexjet. He is a bonafide billionaire. And he's like, yeah, I go fractional. Not even necessarily because of the financial piece. He's like, it's probably more expensive. He said, but instead of owning my own aircraft, I don't want to have to deal with pilots, I don't want to have to deal with hangars, I don't want to have to deal with insurance, I don't have to deal with management companies. He said, I want to call, show up, fly, pay my bill. Like that's all I want to do. And so there is like a pita, right? Pain in the arse, you know, factor to it that, you know, is definitely something to consider. And if you're flying, one other thing, this is just like a little tidbit that I've been telling all my real estate friends. If you're in real estate and you're thinking about going with a fractional purchase, you should really consider the days based model because your economics get a lot better when you have days based versus hours based. So NetJets and Flexjet, you buy 75 hours with, it's like a million dollars down and $10,000 a month in the days based model. Same buy in, same economics. But the minute you fly three hours in a day, your hourly expense goes down dramatically. And if you're going out and back. So if you want to do a roadshow of all your properties in the Southeast in a day, you could drive your economics of flying down significantly. Like down in like the four to five thousand dollars an hour range, which is stupid. I mean, that's stupid low for flying fractional as opposed to like the equivalent charter would be like 10,000 an hour. So something to consider when you're like looking at it Is like figure out your actual mission and like what is your flying look like before you make one of those types of decisions.
- [41:09]
D
Absolutely, that's an excellent point. And I know we're coming up on here on time, so it's got a few rapid fire questions here for you. Someone who just wants to get started their first time in the game. Do you have a suggested jet that makes the most sense for them?
- [41:22]
B
Yeah, the Citation xls or the Citation Excel if you're talking about something. Either that or something like a Citation Jet if you're going to say, if you use the word jet. So CJ CJ1, CJ2, if you have kind of a smaller team, smaller family, or the citation XL. XLs are both really good options if you just want to get into the flying private game. PC12 and the King Air are both hard to beat because they are turbo props, but they're very effective and efficient to run on an hourly basis.
- [41:52]
D
Nice, nice. And what was the wildest deal that you've ever seen?
- [41:55]
B
So I had a client who owns a lot of hotels and lots of different operating companies, and he decided to visit one of his hotels in Mexico while we were closing on his global. And so he was out of commission. And we're like trying to close in this deal. Nobody could get a hold of him because like the cell service at his hotel is kind of terrible. It's, you know, out of the country. And so we're all like, we can't get a hold of this guy. We need to sign loan documents. Right. Like, we need to close this thing like tomorrow. And so I was ready, I was getting ready to go to his hotel, like I was going to get on a commercial airliner and like just go sit in his lobby and be like, hey, where are you? And then finally he called us, he called us back, was like, hey, what's going on? Sorry, I was on the beach. We're like, dude, we've been trying to call you for like six hours. He's like, ah, you know, it's all good. So he ended up signing loan docs and we got to close the next day. But it was, that was my, my almost trip to a hotel that somebody owned to sit in the lobby and be like, I'm here with the owner.
- [42:53]
E
That was like a, that was like, yeah, it was like a personal carrier right there.
- [42:56]
B
Yeah, exactly. Hey, we go above and beyond.
- [42:58]
E
Yeah.
- [42:59]
D
That is what I call white glove service right there. That is. That is incredible.
- [43:02]
B
Exactly.
- [43:03]
E
That is crazy.
- [43:03]
B
Exactly.
- [43:04]
D
All right, so. So I think it's going to be the last question here. Where can listeners, if listeners wanted to work with you, where could they work with you? And what's the first and what's the one thing you wish everybody knew, every buyer knew before they contacted you?
- [43:17]
B
Yeah. So you can find me@prestigefinance.com or my first and last name, PrestonHolland.com, that's my newsletter. So either of those easy to find me at? I'm pretty reachable by either of those, I would say. The one thing that I wish people knew when they were, you know, before they were talking to me is one is it's a lot more like buying a business than like buying a car. So understand that this is going to be, it's going to be a cavity check. We are going to make it as easy as possible on you to make sure that it's not painful for you, the principal, but it is going to be more tedious. It is not as simple as, oh, I'm worth this much money, you should believe it from this piece of paper and my credit score. But it's going to be a lot closer to buying a real estate building or something like that. So understand that it's going to be, you know, there's going to be a lot of complex structures to put together, but that's where we try and create some market efficiencies there. Right.
- [44:10]
D
So, yeah, definitely appreciate you joining us on the show today. We'll put all that in the show notes. I'll put your Twitter in the show notes as well for anybody who wants to follow you there. Thanks again for joining us. Before we kind of wrap this one up and put a final bow on it, any final parting words you want to share with the audience?
- [44:24]
B
No, I think private aviation is David Senra puts it this way. On the Founders podcast. He was having lunch with Sam Zell. If you're a real estate guy, you know that name. And Sam said to David, he said, david, you have to work as hard as you possibly can until you can fly private. He said past that, he said it's kind of, it's pretty vain. But he said you have to get to the point where you can fly private because it is the only thing that will change your life. It saves families, it saves relationships, it saves businesses, it saves lives using medevac and things like that. So be sure that you know, when you're thinking about it, understand that it's not just champagne and caviar, but it really is a tool that'll change your life. And make it so much better. So learn to, you know, learn to fly private. It's a great spot.
- [45:16]
D
So, so, you know, you've, you've not made it. You have to continue working until you hit the point where you can fly private. And that's when you know you rang the bell and you really made it. So I have a long way.
- [45:24]
B
That's exactly right. Yeah.
- [45:26]
D
That ladder. But yeah. Thanks again for joining us on the show today. We'll drop all that stuff again in the show notes. And thanks again.
- [45:33]
B
Awesome. Thanks guys. Thanks for having me.
- [45:35]
A
The Tech Smart Real Estate Investors Podcast is for general information purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. Information on the podcast may not constitute the most up to date legal or other information. No reader, user or listener of this podcast should act or refrain from acting on the basis of basis of the information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Use of and access to this podcast or any of the links or resources contained or mentioned within the podcast show or show Notes do not create a relationship between the reader, user or listener of the podcast and the host, contributors or guests. Any mention of third party vendors, products or services does not constitute an endorsement or recommendation. You should conduct your own due diligence before engaging any vendor. For more information, reference the show notes or description of this episode.
- [46:22]
C
Thanks for listening to today's show.
- [46:25]
B
If you enjoyed the show, please find.
- [46:27]
C
Us on itunes and leave us a review. You can also email us@contactherealestatecpa.com with any feedback or topic suggestions. We are always taking on new clients and with the new tax laws in play, you really don't want to navigate this alone. Let us help you save money on taxes with your accounting and CFO needs to become a client. Navigate to our client page@therealestatecpa.com and fill out a web form with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your week.