Hypothetical Plane Purchase Scenario

Sinistar

Sinistar

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I am curious how a financially smart, wealth off individual would go about this scenario. Lets say his name is Bill.

Name: Bill
Age: 48
Job: CFO of a large successfully company
Salary: $640K/yr + 20% bonus in good years
Cash Available: $1.3M (Its not all in cash but can go there if needed)
Experience: 610hrs (Commercial/IR/HP/Complex)
Current Plane: Bonanza (owned)
Hangar: Owned
Location: Towered Airport (Delta) with all required services.
Plans: Make recurring flights between Denver / Minneapolis / Kansas City
Hours: Expects to fly 170hrs per year (not paid for by work)

So Bill and his wife and have been talking about getting a faster and new plane. She has persuaded him to get a Cirrus (chute) and he has decided to get a NEW SR22T. He thought about the Vision Jet but prefers the SR22T. Bill doesn't want a twin either. He can easily afford $400/hr operating costs and is a good pilot. He will get all the Cirrus training he needs. So this question is about how would he go about buying this plane. How does a wealthy person go about this to not have to part with any more money than they have to, etc ?

Is he best to buy it outright? If so, how would he best avoid/minimize sales taxes and other fees?

Is he better off to finance part of it? If so, why is this cheaper for him in the long run (eg. 10years)?

It seems people like this always put the plane in a LLC - why?

Will Bill be depreciating this airplane?

How does someone like Bill go about getting this plane (sole owner) while parting with as little of his $1.3M that he has available?
 
Buy it in NY state as a resident of the state and you won’t have to pay sales tax on GA aircraft. ;) That’s all I got, because you have more cash on hand at 1.3mil than I ever will.
 
Lachlan said:
Buy it in NY state as a resident of the state and you won’t have to pay sales tax on GA aircraft. ;) That’s all I got, because you have more cash on hand at 1.3mil than I ever will.
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I had no clue there were zero sales tax states for aircraft!

And "Bill" has like $1,299,992 more than I do. I just never really thought about how these wealthy people buy big items like this and how they part with as little money as possible.
 
Bill needs a company with a better bonus structure but I’ll take his base pay.

I don’t think you can avoid sales tax without moving. No voodoo magic there.

How to structure the purchase depends on a lot of variables not available in the scenario.
 
NealRomeoGolf said:
By the way, usually the “financially smart” part of this is hiring someone who specifically knows the tricks. If Bill is a good CFO, he may already know them. If he doesn’t, he should have a network of people that do. Otherwise I question his CFO abilities. :)
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Exactly. I would think anyone in the income bracket of “Bill” either knows the “tricks” or likely has direct access to those who do.
 
My friend, who is better off than “Bill”, finances the large airplane purchases. Cash only for the smaller stuff.
 
Bill has a bunch of options. Depending on state sales and use taxes, he may be best off purchasing the plane in an LLC and renting it from the LLC to himself. He will avoid sales tax but pay use taxes on every hour flown. This can be advantageous based on how much he flies and whether it is pure personal flying or a mix of business and personal. It is a bit of a hassle to do all the extra paperwork/filing. That kind of setup benefits from using a tax advisory firm that specializes in aircraft tax structuring. There are a bunch out there.

The rest - finance vs. cash, new vs. used, etc.. is pretty much personal preference and financial risk tolerance so it’s hard to give really definitive advice. That said, personally, I think buying a new SR22T at that net worth/income level is a bit aggressive. I bought used and my NW and income numbers are a good bit higher than Bill’s. But I’m also a bit younger and have a 1 year old and another on the way and I’m naturally financially conservative. For all I know, Bill may be childless and single and have a family history of males dying early of inheritable cardiac disease- in which case, live it up!
 
Sinistar said:
Is he best to buy it outright?
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Only Bill can answer those questions based on his location, tax status, etc. As mentioned above, since he is a CFO I would hope he could figure that out. You can have 2 people on the same street, in the same town/state, require 2 completely different paths to gain the best bang-for-buck for a purchase of identical aircraft. It is heavily subjective to the individual and the state they reside.
 
I would consider the value of a million bucks solidly invested and making airplane payments vs. the value of zed invested while maintaining a depreciating asset.
 
I'd be looking at a SETP myself.... I won't pay a dime to Cirrus. Its a friggin Chinese owned company. Be part of the solution, not the problem.
 
RudyP said:
...my NW and income numbers are a good bit higher than Bill’s.
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I took the OP to mean that Bill has $1.3M worth of uncommitted discretionary funds rather than Net Worth.
 
RudyP said:
Depending on state sales and use taxes, he may be best off purchasing the plane in an LLC and renting it from the LLC to himself.
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If Bill were to go that route, then the airplane has to available for rent to others also. The IRS frowns upon personal self dealing if you're not a business. Bill needs to start a business that has a legitimate use for an airplane. Then he can form an LLC to purchase the plane and his other LLC can lease the airplane from his airplane LLC as long a it is for legitimate business use. Many of my friends use this method to lower their liability exposure for their main companies. They set up various LLC's to buy property/equipment and then lease it back to their main company. If their main company gets sued for whatever reason then the liability exposure is practically nil as their main company has no assets.
 
asicer said:
I took the OP to mean that Bill has $1.3M worth of uncommitted discretionary funds rather than Net Worth.
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Well yes, I wouldn’t think anyone would sell their house, business or illiquid investments to buy an airplane. Nor would a 48 yr old with high six figure income only have less than 2x annual income in net worth. I was making an assumption that if you have $1.3m in cash or equivalents, you don’t have a net worth much higher than mid single digit millions. I suppose that could be wrong, but I bet I would be right in 90% of cases.
 
Time for me to be a little bit of a wisenhiemmer here :D


Sinistar said:
Job: CFO of a large successfully company
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If your meaning of CFO is Chief Financial Officer, and if Bill is a CFO and is asking these question I have an issue with Bill and his abilities on being a CFO... Bill is the sort of guy I would go to with these questions as he could probably run these calculations in his head... at least the CFO of my company can.

LLC.... Again, Bill should know the answer... or if Bill is a C-Level exec he should ring up his general consul and get the answers

As for coming out of pocket... Bill would know one simple rule of purchasing, you make money when you buy something, not when you sell it... Bill would also know that in all transactions he who holds the cash controls the conversation.. Bill would also understand that maybe parking that $1.3 mil somewhere that is going to yield a monthly return where it may be just enough to handle a monthly payment predicated on interest rates, or at least off set the loan servicing.

As for Bill's $640K a year day job, does Bill have a lofty mortgage, high maintenance wife, and kids in the Ivy League?
 
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RudyP said:
Well yes, I wouldn’t think anyone would sell their house, business or illiquid investments to buy an airplane. Nor would a 48 yr old with high six figure income only have less than 2x annual income in net worth. I was making an assumption that if you have $1.3m in cash or equivalents, you don’t have a net worth much higher than mid single digit millions. I suppose that could be wrong, but I bet I would be right in 90% of cases.
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I’m with Rudy. It really comes down to net worth. Lower 7 figures and I’d stick with the Bonanza. Of course, as you got closer to $10 mil, I’d go with a used TBM.

I would also not finance it.
 
RudyP said:
Well yes, I wouldn’t think anyone would sell their house, business or illiquid investments to buy an airplane. Nor would a 48 yr old with high six figure income only have less than 2x annual income in net worth. I was making an assumption that if you have $1.3m in cash or equivalents, you don’t have a net worth much higher than mid single digit millions. I suppose that could be wrong, but I bet I would be right in 90% of cases.
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I didn't see any mention of a net worth. Is there any reason to assume that the 1.3 million in cash is all this person has?
 
Bill has already made first mistake in deciding he wants to buy a Cirrus. All else he does compounds this initial error in judgement
 
Unit74 said:
I'd be looking at a SETP myself.... I won't pay a dime to Cirrus. Its a friggin Chinese owned company. Be part of the solution, not the problem.
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Why is that better or worse than a not-made-in-USA TBM, or Pilatus?
 
Kenny Phillips said:
Why is that better or worse than a not-made-in-USA TBM, or Pilatus?
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Because they are not as a nation stealing our intellectual property from right under our noses. Trying not to make this SpinZone, but its the truth.
 
NealRomeoGolf said:
By the way, usually the “financially smart” part of this is hiring someone who specifically knows the tricks. If Bill is a good CFO, he may already know them. If he doesn’t, he should have a network of people that do. Otherwise I question his CFO abilities. :)
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I think I wasn't clear enough in my hypothetical (tough to get right on POA :). My hypothetical was meant to say that "Bill" is very smart about all this kind of stuff. Let's assume he is the kind of guy who pulls this off and does so in a way where his minimizes his losses the best he can...way better than I would be able to. So I was hoping people here could explain all the smart stuff all the Bill's out there know that I don't know vs just responding along the lines of your post where we are questioning Bill's financial smarts....lets just go with "Bill is friggin' smart and going do this right."

So what does "Bill" do?

Maybe if this helps, I'll add a bit more to his scenario:

Wife: Nurse Practioner and no school debt at age 48
Kids: Both finished with college, one lives nearby the other in KC (part of the reason for the plane)
House: Estimated worth $925K, loan was $590K and $195K payoff
Winter Place: A small place down in Naples (worth $225K, paid off, not selling)
Family Cabin: Inherited from wife's family, worth $395K, paid off, not selling)
Retirement: 401K's, IRA's, Several stock holdings, etc.

Where will he will get his cash:
The obvious first item to sell is the Bonanza and his is nice condition and he figures he'll get a nice price. Next, he and his wife have a nice boat and slip down in Florida. But they just don't use it that much and have also decided to sell it. Finally, they hold several stocks and one stock in particular is down just a bit and he feels its time to get out. He will take about 5% loss.

$125K - Selling the Bonanza (no debt)
$360K - Formula 400 (no debt)
$185K - Slip (for the boat, no debt)
$630K - Stock sale, net loss of 5%
---------
$1.3M

…."Bill" is definitely ready to sell the Bo, Boat and Slip. He's not happy about that loss on the stock but -5% seems like the best he's gonna see and his advisor has told him to get out of it.

So what does a "Bill" do? How do these guys part with as little money as possible and still get the next nice toy?
 
FormerHangie said:
Are you asking for a friend?
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LOL - any friend like that wouldn't ask me...way out of my league. Actually, I am mainly asking because this high end airplane/boat stuff is a mystery. I loved that episode of Seinfeld where Kramer thinks you "Just write it off" :) Maybe it is that easy, but how does these guys set it all up. I would think the last thing I would do is part with $1M on a plane if I had all that available as cash. So you would think Cirrus would have some pretty appealing finance options for people in this league. But that means paying interest on a depreciating asset. Yet you hear about people depreciating planes...so can "Bill" do this in his case, etc?
 
mondtster said:
My friend, who is better off than “Bill”, finances the large airplane purchases. Cash only for the smaller stuff.
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I sort of figured as much. Is he also finding a way to bring depreciation into the larger purchases to help offset the financing fees? Or does he just know he will always be buying and selling and would probably rather spend the financing costs to not have to go all in.
 
Sam D said:
I’m with Rudy. It really comes down to net worth. Lower 7 figures and I’d stick with the Bonanza. Of course, as you got closer to $10 mil, I’d go with a used TBM.

I would also not finance it.
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Thanks for responding. I was wondering about this. On paper "Bill" has enough to buy it, yet at their income level a brand new SR22T which will easily push $1M seems a bit high for his income level.

You said you would NOT finance it. I hope I read that right, meaning if you wanted the plane and had the money you would purchase it outright? Is this only to avoid financing fees or some other advantage I am missing?
 
KA550 said:
Bill has already made first mistake in deciding he wants to buy a Cirrus. All else he does compounds this initial error in judgement
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I have to admit...that's why I started off with him owning a Bo...otherwise every solution would be a Bo LOL :)
 
Sinistar said:
I sort of figured as much. Is he also finding a way to bring depreciation into the larger purchases to help offset the financing fees? Or does he just know he will always be buying and selling and would probably rather spend the financing costs to not have to go all in.
Click to expand...

I’ve never asked for details, but my impression is that he’d rather hold onto his money and use it elsewhere, where it will benefit him more. For the most part, the airplanes are toys so I don’t think he worries about depreciation.
 
Sinistar said:
I am curious how a financially smart, wealth off individual would go about this scenario. Lets say his name is Bill.

Name: Bill
Age: 48
Job: CFO of a large successfully company
Salary: $640K/yr + 20% bonus in good years
Cash Available: $1.3M (Its not all in cash but can go there if needed)
Experience: 610hrs (Commercial/IR/HP/Complex)
Current Plane: Bonanza (owned)
Hangar: Owned
Location: Towered Airport (Delta) with all required services.
Plans: Make recurring flights between Denver / Minneapolis / Kansas City
Hours: Expects to fly 170hrs per year (not paid for by work)

So Bill and his wife and have been talking about getting a faster and new plane. She has persuaded him to get a Cirrus (chute) and he has decided to get a NEW SR22T. He thought about the Vision Jet but prefers the SR22T. Bill doesn't want a twin either. He can easily afford $400/hr operating costs and is a good pilot. He will get all the Cirrus training he needs. So this question is about how would he go about buying this plane. How does a wealthy person go about this to not have to part with any more money than they have to, etc ?

Is he best to buy it outright? If so, how would he best avoid/minimize sales taxes and other fees?

Is he better off to finance part of it? If so, why is this cheaper for him in the long run (eg. 10years)?

It seems people like this always put the plane in a LLC - why?

Will Bill be depreciating this airplane?

How does someone like Bill go about getting this plane (sole owner) while parting with as little of his $1.3M that he has available?
Click to expand...


Based on these numbers Bill can not afford a new SR22. Better stated, he should not afford one, if unless he is financially foolish.

Bill should get a used SR22 G2 or G3 model for the best value.

With Bill’s salary and only. $1.3mm saved up, he’d better prioritize retirement savings.
 
650k salary, an almost 1mil house, a nice place in Naples and a family cabin...I really wish I could be in Bill's shoes and have such problems. I used to think I was doing pretty good with my low-low/medium six figure salary.
 
Sinistar said:
I think I wasn't clear enough in my hypothetical (tough to get right on POA :). My hypothetical was meant to say that "Bill" is very smart about all this kind of stuff. Let's assume he is the kind of guy who pulls this off and does so in a way where his minimizes his losses the best he can...way better than I would be able to. So I was hoping people here could explain all the smart stuff all the Bill's out there know that I don't know vs just responding along the lines of your post where we are questioning Bill's financial smarts....lets just go with "Bill is friggin' smart and going do this right."

So what does "Bill" do?

Maybe if this helps, I'll add a bit more to his scenario:

Wife: Nurse Practioner and no school debt at age 48
Kids: Both finished with college, one lives nearby the other in KC (part of the reason for the plane)
House: Estimated worth $925K, loan was $590K and $195K payoff
Winter Place: A small place down in Naples (worth $225K, paid off, not selling)
Family Cabin: Inherited from wife's family, worth $395K, paid off, not selling)
Retirement: 401K's, IRA's, Several stock holdings, etc.

Where will he will get his cash:
The obvious first item to sell is the Bonanza and his is nice condition and he figures he'll get a nice price. Next, he and his wife have a nice boat and slip down in Florida. But they just don't use it that much and have also decided to sell it. Finally, they hold several stocks and one stock in particular is down just a bit and he feels its time to get out. He will take about 5% loss.

$125K - Selling the Bonanza (no debt)
$360K - Formula 400 (no debt)
$185K - Slip (for the boat, no debt)
$630K - Stock sale, net loss of 5%
---------
$1.3M

…."Bill" is definitely ready to sell the Bo, Boat and Slip. He's not happy about that loss on the stock but -5% seems like the best he's gonna see and his advisor has told him to get out of it.

So what does a "Bill" do? How do these guys part with as little money as possible and still get the next nice toy?
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It really depends on Bill’s philosophy on debt. You have the camp where you finance that purchase and make the money “work” for you and you have the camp where you don’t carry debt ever. It also depends on how much time he wants to put into doing the LLC thing to see if some of the tax things could work. The most complicated tax thing would require him to lease back the plane. As RudyP said, there are firms that handle this.

I tend to sit in the camp that gets rid of debt quickly. Depending on Bill’s saving rate from his salary, he could easily build his nest egg back up if disciplined. I wouldn’t say that he shouldn’t buy the SR22 with cash. It sounds doable to me.

If it were me personally, i would probably use the stock sale to buy 2/3 in cash and finance the rest (I am a hybrid of the two - I hate debt but I hate not having cash). I would guess Cirrus has ways to finance or he could go with the other traditional plane financing options.
 
Not a tax guy..... but want to add 0.02 to the finance vs cash decision.


Part of the equation needs to be the cost of money vs how much it can earn. I can pay my mortgage off any day I want, but don’t because that same money earns me 2-3x my mortgage interest rate.
 
kaiser said:
Not a tax guy..... but want to add 0.02 to the finance vs cash decision. Part of the equation needs to be the cost of money vs how much it can earn. I can pay my mortgage off any day I want, but don’t because that same money earns me 2-3x my mortgage interest rate.
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This is one of the questions I had asked our CFO one day... as she put it "never carry debt if you have too" And being in a similar situation like you, I chose to get the house paid and the rental property paid off...

Yeah... it took a hit for about a year on the interest earning but in the long run we're doing better...
 
KA550 said:
Bill has already made first mistake in deciding he wants to buy a Cirrus. All else he does compounds this initial error in judgement
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Bill got permission from his wife on the plane he could buy. He should ask her how to buy it.
 
Sinistar said:
I think I wasn't clear enough in my hypothetical (tough to get right on POA :). My hypothetical was meant to say that "Bill" is very smart about all this kind of stuff.
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And the plot thickens... I think Bill should stick with renting the 152 at the local airport and stop watching Lifestyles of the Rich and Bogus...:D
 
Unit74 said:
Because they are not as a nation stealing our intellectual property from right under our noses. Trying not to make this SpinZone, but its the truth.
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Then Cessna owes Switzerland for their rip-off of the PC-12 called the Denal
AnthonyS1 said:
650k salary, an almost 1mil house, a nice place in Naples and a family cabin...I really wish I could be in Bill's shoes and have such problems. I used to think I was doing pretty good with my low-low/medium six figure salary.
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One thing I learned early was never to get yourself down by envying someone else's life. You can make of yours what you can, and it will require all of your attention for best results. Don't wish to be in Bill's shoes when yours fit just fine.
 
Sinistar said:
"Bill" is very smart about all this kind of stuff.
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He can't be that smart. He wants to increase his aviation footprint rather than reduce it or get rid of it and save his hard earned money.
 
Sinistar said:
Yet you hear about people depreciating planes...so can "Bill" do this in his case, etc?
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Bill is a highly paid W-2 employee whom the IRS dearly loves. Unless Bill is smart and starts a business where an airplane is essential and incidental to the business, he is SOL on writing off any depreciation costs.

Oh and another thing... Bill will not be getting the full amount from his stock proceeds. He'll be paying 20% capital gains tax on the sale of that stock. Now if Bill was a smart CFO, he would know that he could defer or eliminate all those capital gains from his stock sale and use those proceeds to start a business (airplane leasing) in an opportunity zone and another business in the same (or other zone) which would require the use of an airplane (contract locum nurse placement) and basically fly for free.
 
azblackbird said:
Bill is a highly paid W-2 employee whom the IRS dearly loves. Unless Bill is smart and starts a business where an airplane is essential and incidental to the business, he is SOL on writing off any depreciation costs.

Oh and another thing... Bill will not be getting the full amount from his stock proceeds. He'll be paying 20% capital gains tax on the sale of that stock. Now if Bill was a smart CFO, he would know that he could defer or eliminate all those capital gains from his stock sale and use those proceeds to start a business (airplane leasing) in an opportunity zone and another business in the same (or other zone) which would require the use of an airplane (contract locum nurse placement) and basically fly for free.
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He won’t be paying any gains if he is truly selling at a loss. He should find something with a gain to also sell and get that gain for free with the loss to offset. But now we are digressing...
 
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