← Tax Smart Real Estate Investors Podcast
Tax Smart Real Estate Investors Podcast
MLRE: Flying Private: What Syndicators Should Know About Deducting a Jet
00:25:50
In this episode, Nate and Tom break down the trut…
Loading summary
Transcript53 lines
- [00:05]
A
Welcome to the Major League Real Estate Podcast, a podcast for operators of large scale real estate portfolios. My name is Nathan Sosa and I'm your host. Together with my co host, Matt Hamilton, we talk about tax and legal strategies and we bring on operators large portfolios for in depth discussions on how they grow their business. We hope you enjoy. Welcome to another episode of the Major League Real Estate Podcast. I am joined by Tom today and one of the topics we're going to talk about today is something that we actually did cover on the tax from my REI podcast a little bit, but we wanted to make it specific to syndicators and developers this time. And so we wanted to talk about what happens when people are looking into deducting planes, investing in jets, doing that type of stuff. Right. So go check out our episode of Preston Holland from a few weeks ago. Fantastic opportunity to talk about that. But today we just want to be, Tom and I, to discuss how this works and a little bit more of the tax intricacies that go along with it. So we'll get to there with that. But as always, we need to do our temperature check with Tom. Right. The rest of the country is basically buried in the cold right now, but I think Tom is saying that like he said, going to the pool today, is that right?
- [01:05]
B
Yeah. Well, today, right now it's 79 degrees right now as we speak here in Miami. And it's been warming up here right now it's going to be in the 70s and 80s as we kind of move into this next week.
- [01:17]
A
So, yeah, you know, so Tom's got flip flops and swim trunks on. He's going to be heading out to the pool right after this. So, no, it'll be fun to check in with you. Hopefully it doesn't ever get too hot down there in Miami. But Tom, have you flown private before? Have you ever flown private? I have not. I would love the opportunity to do so one day if anyone's listening and says, hey, you want to take me out to go do this? I would love that. But have you ever flown private yourself?
- [01:40]
B
I've not flown private yet. It's not been a priority for me to figure out, find a connection for that. But yeah, so to answer your question, no, I've not done that yet.
- [01:49]
A
Yeah. So a lot of syndicators love the idea of flying private and for good reason. Right? A lot of syndicators, real estate developers, I think they like doing that because it saves a lot of their time and money. Plus there's nothing sexier than a Private jet, there truly is not. It's a special glamour to that area, I believe. And once you get to a certain net worth perspective, then you can start going, maybe I can actually do this right. Then you hear about taxes and then that's when you really start to think about it. Am I right, Tom?
- [02:21]
B
Yeah. Yeah. So a lot of people are, you know, not only is flying private, just, it's very sexy. This day and age is a status symbol. Everybody wants to fly private. They want to post it on Instagram, tell their friends, hey, we took a private jet to wherever we took the private jet to. And then of course, here on the business side of things, you know, what are the tax benefits involved? And when you find out that you can 100% bonus depreciate a private jet, things get really interesting. But as I think we'll find out here, that it's not as easy as I just said it was.
- [02:50]
A
So it is not, it's not as easy now, granted. So we kind of talked about like, sure, you fly private. I mean, like, obviously it's way more fun if it's for personal. But a lot of times people will like look at their business needs and the flying out. Maybe they've got properties across the country or deals they need to analyze across the country or sites that they're currently looking at to develop those types of items. Like there's a lot that exists out there for a business need for flying, right? Just think about any company executive who's on the road every week going out to different sites to go figure things out, right? Or a family office that has different investments across the year. Essentially what I'm saying is the fastest way in today's day and age so far is flying. And so getting that business jet gives you a separate opportunity to try and maximize that. Now why is that, Tom? I heard. Is it because of our favorite word other than cost? Seg, Right?
- [03:41]
B
It's because of depreciation.
- [03:43]
A
Right.
- [03:43]
B
Isn't that depreciation? That's the biggest reason. Because a private jet's typically going to be five year property. Right? Five year property is under 20 years, obviously. And with that it makes it eligible for bonus depreciation, which means you could write off the entire cost of your private jet in one year. Of course, if certain things are, are
- [04:01]
A
done the right way. Right. That's a, that's a key point right there. But yeah, I mean, like look, you look at a million, we'll still do this is on the low end, by the way. Million dollar jet, right. I'VE actually seen multiple multi play out. So million dollar jet, you purchase it, use it 100% for business. Right? We'll get into the limitations. Very similar to vehicle limitations, to be completely honest, with some nuance. But you invest, you purchase that million dollar jet and 100%. But before the one big beautiful bill and $600,000 write off, still pretty awesome. But now with one big beautiful bills back, you get a straight million dollars deduction immediately, which, which turns in basically $300,000 in tax savings. So, so it helps you consider that cost of expenses and all of that. Basically it makes a lot of sense and it feels like a good idea, especially for those who are, who, who are syndicators and like you've got properties across the nation.
- [04:51]
B
Yeah, no, absolutely. It's definitely flying private can make sense in certain situations. Right, but as we talked about with Preston though, it's, it's not the cheapest thing though.
- [04:59]
A
It is not the cheapest thing. And so like we talked about that too. It's like getting NetJet cards, fractional pieces of ownership. Right. There's a lot of other opportunities too. We're going to focus on just purchasing a jet today though. And then we'll like, maybe down the road we'll circle back up to those other options. But Tom, that's typically what I've seen when it comes to like purchasing jets and trying to write them off and how that looks, right? How this typical structure occurs. So essentially you form an llc, you purchase this jet, right? And of course, because you're not going to use it every single day, as all good business owners, you'd like to make a little bit of cash off that, right? You'd like try, at least try to. So then you lease it out to some kind of flight school charter operator. Basically you let somebody else use it when you're not using it. Sounds like a short term rental in my opinion. Right? Kind of sounds like a short term rental here says, hey, I'm just not going to use it when let someone else use it out. Right? Taking good advantage of your investment totally makes sense. You claim the depreciation, deduct all the operating expenses. Hey, at least getting maybe enough cash to at least cover some, if not all of your costs that are associated with it. And so you're good to go, right? And so then you, you do that, you purchase this jet, you feel like you wipe your hands and you go to your go to file with your CPA and go, great, I'm gold. Good, right. I should be getting $300,000 back. Is that always the case?
- [06:10]
B
No, of course not. Because of course you do have to be aware of material participation. And with material participation, renting a jet, right? If you're going to rent a jet out to a third party, it is a rental activity, right? And what do we know about rental activities? For anybody who's, who's tuned into the TSI podcast, for example, rental activities are passive by default. What does that mean? It means that the losses generated by passive activity cannot offset your non passive income. So how do you get around that? When you have a private jet, you have to materially participate in the operations of the jet rental company, so to speak. And I guess my question to you Nate, is, is that possible?
- [06:46]
A
So what's even crazier Tom, is at least with real estate we have like this special carve out called real estate professional status. We don't have airplane professional status or anything like that. So if it's a long term lease, like I just brought up like you lease it to a charter school or some other group, right. Basically, let's say like I call it like an arbitrage essentially. Right? So if someone else is using your jet and they are not using it for an average seven days or less, more likely than not, this is a pure passive activity with almost zero exceptions. Actually you're completely trapping yourself into a passive activity because.
- [07:21]
B
Yeah, because it's a rental activity at its face and it's not necessarily an operating activity like others. So it's just like even if you did materially participate in it, it would still be non passive because it's a rental activity at the end of the day.
- [07:34]
A
Right, Exactly. Unless we do something similar to the short term rentals, right. Then once you hit one of the exception buckets, if your average period is seven days or less, then it is possible for you to use the deductions. Now that's the key point here. And so honestly in my opinion you must either a needs to be rented on average seven days or less, which look, most jet rentals are seven days or less. So like if you're doing it that way, however, most people are going through charters, right? They're going through management company to get their jet. They're trying to figure out so you have the long term lease out. So unless you can then, which we'll talk about later, group this or something of that nature, you're going to be stuck in the passive bucket. The obviously the easiest, easiest example is just to use it for your business right now what gets into business use Is very, very important. That's the next key piece in my opinion. But like I said, it looks and sounds easy on its face. Right. I know people come to me all the time about other equipment rentals, right. Oh, I'm going to buy a bulldozer and then rent it out to a company. The same limitations apply. Actually it's not that simple.
- [08:33]
B
Yeah, no. Long story short, it's a lot harder.
- [08:35]
A
Right.
- [08:35]
B
Because if you're going to be doing this like you need to actually operate like a jet, like charter and be. Absolutely. It's a lot more under the wings so. So to speak than just a standard rental property or short term rental which you might see in other areas.
- [08:47]
A
Exactly. And so there are really, I like to say four walls specifically that you have to consider with these types of investments. Have to consider, right. So the first one we've kind of covered we will come back to because there's more nuance to it. It's 469, right. That's basically. Can you be active in this? The answer is yes you can. But it's not as easy. Right. There's actually just in terms of normal law, not tax law. There's different kinds of like Drew, it was a dry lease and a wet lease, right. So the dry lease basically says hey, I don't have any crew, I don't deal with anything other than that. I just give it to the management company and they handle everything. Right. That's that long term lease situation where unfortunately you're probably in a not great bucket and you're probably not able to take an active deduction. You got passive, you're probably fine. Now if it's a wet lease that means you have a crew and you're renting it out to other people to deal with. So that would mean. But there's significant different laws there that happen with that. Right. And so that means you have to totally consider that and like get different permits, get different flight crews. Right. There's a whole other part of the operation that you got to consider. One of the other ones is 465. This is at risk limitations. Now technically this doesn't happen as often in like the jet world but it is important because if you are able to get non recourse debt on this jet, you can only deduct in depreciation up to your investment. So this doesn't apply to real estate. So it's like this is honestly why it blows syndicators minds when I talk to them about this is because normally in real estate you have what's called qualified non recourse. Every mortgage that you deal with is going to be tied to some kind of piece of real estate. You can take depreciation deductions because now it's basically viewed as recourse debt, which you're not at risk for, essentially.
- [10:22]
B
Right?
- [10:22]
A
So normally we look at basis. Can you deduct up to your basis? If your loan's included in that for real estate, you're always fine. That's not the same way with other investments. And in this case, you have to have a personal guarantee on that jet. That is pretty common practice with. But there's been other times where I've seen people say, hey, they get a different loan and it's not secured by real estate or anything like that. And it's not personally guaranteed. So it creates issues when you try and take this deduction, right? Let's say you only pay down $500,000. That's all you can deduct up to. So that can be an issue sometimes. So that's at the at risk limitation. Then there is 274, which is going to be your entertainment, right? Your personal use. That can be really tricky in my opinion, because now you have to deal with, hey, how much are you using this? Right? Let's say that you buy the jet this year, right? You buy the jet this year and you do it for business. You have five business trips, right? That's awesome. But then you heard on the podcast that Tom's never flown private before. And so you have do five other trips with Tom out of Miami to go to Dubai. Where is the other place you mentioned Tom?
- [11:25]
B
I think Tab before.
- [11:27]
A
There we go. So you take Tom out there. He's never always wanted to visit, so you take Tom out there. Now, unfortunately, you take them out three times, right? And so you had, let's just say, seven business trips to go visit various properties. That means now 70% of your of that plane was used for business. That equals only a 70% deduction, unfortunately. So that means we're limited now on how much we can actually deduct versus 100% business use. This is where people a lot of times try to say, hey, I do one business trip, like at the end of the year in December, right? Try to do that. We do. We see it with vehicles all the time. It's the exact same kind of test that happens here, right? Like that's the exact same thing that happens with like a vehicle. Someone tries to deduct their F150 at the end of the Year, except obviously bigger scale in this example. So just FYI on that piece. Tom, any comments on that right there? I know, I was like, we kind of just covered a lot, right? So any comments or thoughts behind all that?
- [12:21]
B
Yeah, I mean, it sounds like really what you need to get serious about if you are seriously considering purchasing a jet is how often are you really going to use it for business and are you using a lot for business? Are you, are you just trying to kind of like buy this thing to hopefully you can write off all your joy rides to whatever parts of the world that you're going to. Because, you know, you could, you could brag to your friends about the private jet. You take them on the private jet. So, you know, I think there's. That's where a lot of people kind of run into trouble when you kind of get into these like listed assets. And that's why these are listed transactions, by the way, because the IRS and the, you know, the authorities, they know that these assets are often abused, right? So they want to make sure that you're actually going to be using these for business purposes and not just, again, flying around the world and then deducting on your taxes. So I think it's really important. The big takeaway here is understand what qualifies as business use. Understand how often you need to use it for business for this to make sense, and what does not qualify as business use. And it's considered personal use. And you want to make sure you know what it is and you can allocate the time you use the jet accordingly.
- [13:20]
A
Real estate syndication tax is confusing to you. Well, that's why hopefully you listen to the podcast today. Also you should go to our website, www.therealestatecpa. and you'll be able to get access to the Ultimate Guide to Real Estate Syndicators and Sponsors, which breaks down everything from preferred returns, depreciation strategies. Whether you're a GP or an lp, avoid costing mistakes and maximize your returns. Download the complete guide free and get the tax clear. You need to succeed 100%, Tom. And one thing, I'm like building off what you just said about the irs. So the IRS and Congress in it of themselves have really started to look more into the jet write off space. And the reason why is because they think this is a massive area of abuse that they think is easy for them to win. They think that everybody's ignoring all these rules and therefore they're coming after it. For example, there's a tax form that everyone has filed. Now, if you Claim a jet. You have to mark, hey, do you lease or own a jet? And did you write off this year? They're very much looking for that. In 2024, they released via like basically a request from a very large tax organization, basically saying tax resource organization. They basically said, hey, we would like to know what you want to look for in these types of audits that come up. And they go, great, here you go. It was over 400 pages of documentation that they want to see. Wow. So they are not playing around when it comes to this. And they are massively and aggressively auditing these types of structures. And why, like I said, the IRS does not aggressively go after anything unless they think it's easy peasy for them to win. So if you do after this, you have to document and have all this structure correctly in place. Otherwise you'll lose. And that's big dollars to lose, just FYI. Dom, I'm sure you've seen some of that too.
- [15:01]
B
Yeah. At the end of the day, documentation is key. We say it all the time. And it really is. I think a lot of people neglect that because it's not sexy, so to speak. But it's critical, especially when you're dealing again with listed transactions. Like if you're riding off a jet, it's a huge area for abuse. You want to make sure you have your ducks in a row, have everything organized the way it needs to be organized, documented, so that if God forbid, ever does come your way, you are, you're good to go, Right?
- [15:24]
A
Exactly. So it's easy. Like I said, you got to document all that. So to kind of just like summarize that, document your business use case, document your structure and document all your purchase documents too. Right. That's something you have to provide to an agent if that ever comes up. Hopefully it doesn't, but if it ever does come up, just be willing to deal with that.
- [15:40]
B
Okay, so, so usually when we're talking about grouping elections, we're most often talking about businesses and real estate.
- [15:46]
A
Right.
- [15:46]
B
For example, in real estate, if you're estate professional, you can group all your rental properties together as one activity. For if you're for purposes of material participation and deducting losses against your W2 or your other income that you might have from your fees, you know, your promote, things like that. But also another way to do it is when you're grouping a business with a piece of real estate. Right. But curious to know how does grouping, you know, play into airplanes? Like how does it. If you're a private jet, does Grouping matter? Does it even matter?
- [16:13]
A
Yeah, absolutely. It absolutely does. You see it actually come up in a lot of tax court cases. We'll kind of do a brief run through of those here in a little bit. But essentially it's really, really hard to make the sport, Tom. So like that's essentially your only option if you are a rental activity, like going back to talking about before that dry lease, right, Wet lease, you might not need the grouping election as much. But if you're a wet lease, the only way you can take the seduction is via grouping now. And so you basically have to say, hey, is this rent insubstantial to my overall business? Okay, cool. Now how am I investing in it? Right. Is the ownership structure that I'm having, is it the exact same as my business structure that I'm grouping this with? Right. Let's say you have two partners in a business, you're 50 50, then you both go, maybe we should look into getting this jet. Maybe we will use it for the business, but we're also going to rent it out charter wise during the time we're not using it, right. There's a possibility with that type of an election and that opportunity does exist. It's possible. I'm not going to say it's always possible, right? You have to actually have business use logs, records, et cetera. But it's possible. Now a lot of people say it's like, oh, I'm just going to throw it together and say hey, it's totally all business, no worries, right? Like, or something like that. Or you run into the self rental trap. Once again we taught, we've seen this in real estate, very, very similar concepts. But it's just another thing that you have to consider because you have to make that election year one too. When you purchase the plan, if you miss it, you're going to lose. There's no like you're going to acquire a lot of amendment returns. It'll be really expensive to go back and do that. So just FYI, now let's say your business is 50 50, your ownership percentage is the same in your, it's 5050 in your business. But then you get a third partner, right? You need a little, little bit extra cash. So you bring in a third partner, right? And they own 10%. Blows everything out of the water. No longer able to do this, it's no longer a possible structure opportunity.
- [17:52]
B
Why would they put this in a separate llc? Why wouldn't they just have their business buy this, buy the asset itself?
- [17:57]
A
A lot of times it's a separate. Because technically it's a separate business. Right. So like, like if they're not going to use it for their business, they'll want to create another LLC to have a legitimate like they want. They'll create it separately because it needs it for liability purposes. Right. There's a lot of liability that can be with jets and stuff. So that's why they're going to separate it. Unless like you said, they just want to use it for the business and 100% for the business and don't rent it out, no problem. That's, that's an easy question.
- [18:21]
B
So it sounds like if they would buy it and it'd be used 100% for their business, it would, you know, maybe make sense to have the business buy it. You don't have to worry about the grouping election. But if they, we're not going to be using it 100% for business and they're going to rent it out when they're not using it for business. That does make sense to have it in this other entity and make that grouping election. Provided that the ownership structures of both entities, the jet entity and the main business entity, are identical, right?
- [18:45]
A
Effectively, Tom. And either way, even if you bought in the business, even though it's in the same llc, there are different activities, right. Let's say your real estate development or your syndication, right. It's like management or overall, let's call operating at the opco, that's a separate activity. So even if you buy it, purchase it underneath the OPCO and then you have the charter revenue, that's a completely separate activity that needs to be separately reported. So you'd still have to group them together because they don't operate in the same form or function actually. So you'd still have to make that grouping election. It just makes it more definable with the, with the llc. And like I said, there's like always legal that goes into that too.
- [19:22]
B
Makes sense. Makes a lot of sense, Tom.
- [19:24]
A
So now we get to what we love to talk about just at Hall CPA in general, the case law. So can you give me some of the cases that have been involved with this and actually are relevant to real estate developers and syndicators?
- [19:35]
B
Yeah, so we have a few cases here. One of them is Brumball, which is where a real estate developer owned a private jet through an LLC with a management company. However, you know, the court, what the court found through that task card case that the aircraft was not integrated into the business in any meaningful way. And it seems like they Lost the audit in that case.
- [19:54]
A
They did, yeah, effectively. Right. They totally lost that one. So that one was both a documentation and a failed structure. Right. That's going to be the pattern with all of these. There's probably going to be a failed structure and maybe there's possible. But then if you, even if you have good structure, correct structure, if you don't have documentation, you're going to lose every single time. And most of the times these audits come up 10 years post effect. So that's why we have to make them now versus like trying to do them once that IRS letter shows up.
- [20:19]
B
For sure. For sure. And there's more cases here. I mean, we keep going on these cases.
- [20:22]
A
Yeah. Let's talk about Williams. Let's talk about Williams and Dunn.
- [20:25]
B
Yeah. So Williams specifically. What they did is they leased the flight schools and then tried to group this in with a training business. But the court denied their grouping election for a lack of interdependence, which is one of the four criteria when you're making a grouping election.
- [20:38]
A
Right. So that last, the interdependence one, like we talked about on the Tax Smart REI podcast, it basically is like, hey, are you serving similar customers? Right. So that's why grouping two short term rentals totally makes sense. You're serving basically the same customers. However, if you are a syndication business and then you are working on a, like you're like leasing to people who just want to fly. It's totally separate businesses. Right. I think in this one we talk about training. Like, look, that wasn't the same business. A real estate developer doesn't go with a train, doesn't go with a training business. Right. They're not savoring the same customer effectively. So that creates an issue. And they go, guys, you can't group this together at the end of the
- [21:13]
B
day for sure, you know. And then we get into Dunn. Dunn's the next one up here. We got Dunn was a doctor that grouped the aircraft with the medical practice, but looks like they lost because there was no evidence of significant business use. So sounds like they use it personally.
- [21:26]
A
Right? That was part of the thing too. And even if they did use it for business, they didn't have the logs to show, which I find to be crazy because, you know, there's all kinds of documentation out there for when you're using this. Like the pilots you hired, there's got to be all kinds of documentation. So all it requires is just taking that stuff tossing into a G drive. Maybe if you're brave, you throw that into ChatGPT or Claude to snag for you and save away. But those are just some of the options that we have here potentially. Right? And so look, that's just some of the cases that we have documented. I just want everybody to know that like the IRS is aware of this and they know this is going to happen. So we just have to be very careful about it. And so, Tom, we talked about the tax court cases and then we want to talk about what actually works, which I think we've kind of covered through this podcast already.
- [22:08]
B
So here's some things that actually work. If you're actually considering buying a private jet is having the operating company have direct ownership. So if you are the actual management company or the actual operator of the private jet and you're using it more than 50% for business, that could actually work, from my understanding.
- [22:25]
A
Yep, that's the easiest one, right? That's the easiest one. Like, hey, you got to travel around to a bunch of different sites and it happens a lot. It takes a lot of your time. Because one of the key tests that we didn't talk about earlier is you got to have ordinary necessary deductions, right? If like look at it overall and says, hey, it's not going to save me that much time to buy a private jet, which it always does. So that's easy. But if it works for your business, that's awesome, you're good to go. The next one is if you have a legitimate charter business, right? And that's basically going to be where you get that 135 certificate. Great, you're good to go. And you have an actual business, right. Basically you're short term lying in jet kind of cool. Fractional ownership works too, right? There's like predictable stuff. Now it talks about doing 50 to 100 hours. I don't think that's necessarily like a lot of people talk about that. I don't necessarily think that's possible because I think that creates issues from a T dissipation perspective and an activity perspective personally. But I will digress from that. That's a topic for another episode. And then of course, just being okay with passive treatment. Tom. Right. How is that such a powerful move to be able to be like, hey, I just want to use this passively.
- [23:23]
B
I think it's if, if you just understand the rules around this and like, I think it helps frame things that you actually have real legitimate business needs to acquire this, that you're not looking at the, at the tax benefits. It's like, how do I get this massive tax deduction to offset all my income. Or on the flip side, if you are a passive investor or you have a lot of passive investments because maybe you're not a real estate professional, that can offset a lot of your passive income. So that could be a good way to look at it.
- [23:48]
A
Yeah, Tom. And so like it's a lot of work to get certain things to be active. Sometimes if we just accept the passive treatment that is better for us in the long run, it can be better for us. So it's something to consider. Right? A good advisor will always talk you through that. Look guys, aircraft ownership is tricky and complicated and requires not just tax people involved. It also requires a lot of legal people to be involved too. So it's not something to be trifled with. If you're looking at it seriously, you've already figured that piece out. But just work with qualified tax professionals on this. Don't just let someone who just say, hey, yeah, no problem. I've defended people in audits with this before because you know what? It requires a lot more thought and process than just saying, hey, I can do this. No problem. Problem. We have a white paper that is going to be in the Show Note documents and so is a just a beautiful summary of what Tom and I talked about today and so it can help you guys just kind of look at it, think through it. If you are considering something like this, please reach out. We'd love to have a conversation with you and talk about how we can make this work and if it is possible. So just click the link in the Show Notes. If you're a large indicator developer who's looking at working in these kind of fields and thinking about these types of purchases or other large real estate purchases, you need a tax advisor to go through those. So once again check out our Show Notes below. We'd love to have a conversation with you.
- [25:01]
B
Absolutely. Thanks again for everyone for tuning in. We'll catch you on next week's episode of the Major League Real Estate Podcast.
- [25:08]
A
Thanks for listening to the Major League Real Estate Podcast. There are three ways you can connect with us. If you're interested in getting email updates on upcoming shows, go to ww.therealestatecpa.com and subscribe there. If you'd like to explore a tax and accounting relationship with the our CPA firm, you can go to www.therealestatecpa.com MLRE and fill out a web form to get started. And if you'd like to connect with Matt or I on social media. You can find us on LinkedIn or Twitter. Just search Nathan Sosa, CPA. Matt Hamilton, CPA, and shoot us a request. We'd love to connect. See you guys next time.