#77 - The Pilot's Flight Plan to Passive Income: Aircraft Leasing and Tax Benefits with Luke Lysen

[00:00:00] Welcome back to Passive Income Pilots everyone, another week of financial education, Tait Duryea

[00:00:04] here with Ryan Gibson. What's happening man? Not much. I couldn't be more excited about unpacking

[00:00:10] the mysterious world of owning an airplane, getting tax breaks, putting it into a flight school,

[00:00:16] how to shield your income and high income earners are always looking to ways to

[00:00:19] shield income and also be in general aviation because you know, I can be an airline pilot for

[00:00:24] 17 years. I love flying but you know you kind of lose touch with general aviation and you

[00:00:28] want to go back into it and then you realize, yeah you can buy a plane and have fun with it

[00:00:32] but there's also ways to buy a plane and have fun with it, have it pay for itself,

[00:00:37] yeah have it be a tax break for you and really we are going to reveal a strategy in this show

[00:00:42] on how to do it with effective no money out of pocket. Yeah again we talk a lot about taxes on

[00:00:48] this show. We're not giving tax, legal or investment advice. Link up with a good CPA,

[00:00:53] talk to them about these strategies before you try and implement them but

[00:00:56] there's some really, really powerful depreciation benefits here. It's making me excited because

[00:01:01] I love general aviation. I said this on the show but I just put 11 and a half hours on the

[00:01:08] Bananza. We flew it from Reno all the way up through Idaho, southern Idaho and into

[00:01:15] Coeur d'Alene and then all the way back down. So much fun and for me the dream of owning

[00:01:22] my own airplane because I'm just on the insurance for a friend that owns this Bananza.

[00:01:26] The dream of actually owning my own plane has been really far away and this episode kind of outlines

[00:01:33] like maybe it's not that far away. There are ways that you can leverage leaseback pools,

[00:01:38] depreciation benefits to rent the airplane back to yourself and it could be a lot closer than

[00:01:43] you think. And we're going to talk about how you can sort of actively participate in it

[00:01:50] but also make it kind of pretty passive and have a team behind you to support you in

[00:01:55] the aircraft parking, the leaseback, the maintenance, probably help you with a ton of

[00:02:01] referrals on insurance. Where do you even go to buy one? Who do you even call the buy one?

[00:02:05] We're going to bring on that person to the show and he's going to walk you through exactly how

[00:02:09] this all works. Yeah and of course it's not, it's that great investment. In the long term

[00:02:16] it's a depreciating asset. The nice thing about real estate is you get to write it off

[00:02:18] but it increases in value over time. This is something that decreases in value over time right

[00:02:23] but if you want an airplane you might as well get a great tax benefit out of it and yeah we're going

[00:02:27] to show you a way that you can essentially have the government subsidize your down payment for the

[00:02:32] airplane, the entire thing. So without further ado let's get into it. Welcome to passive income

[00:02:40] pilots where pilots upgrade their money. This is the definitive source for personal finance

[00:02:47] and investment tactics for aviators. We interview world-renowned experts and share these lessons

[00:02:52] with the flying community. So if you're ready for practical knowledge and insights let's roll.

[00:02:59] Hey look really nice to see you and welcome to the show. You're riding good to be here,

[00:03:02] thanks for having me on. Yeah so you and I met through the flight academy, the place that

[00:03:06] I actually rent the Cirrus SR 22T in Seattle in the Seattle area. So Renton has a flight school

[00:03:13] called the Flight Academy. You know I actually love flying the Cirrus, it's a great plane to get

[00:03:17] around and I actually first got into Cirrus flying when I went to Atlanta and actually that Tate and

[00:03:24] I we rented a 172 SP and we flew around the southeast Georgia Florida Tennessee to do due

[00:03:30] diligence on a self-storage portfolio. That was a blast. Yeah it was a lot of fun and then

[00:03:35] after a while we're like man you know the ground speed just isn't doing it for us but most

[00:03:39] importantly we like the icing protection that we have you know flight and known icing conditions

[00:03:46] and then we also like the fact that you can kind of get above and climb a little higher and use oxygen

[00:03:50] and things like that. Well anyway I went through this the Cirrus certification program and then

[00:03:54] when I came back to Seattle I was like hey where can I rent a Cirrus and so that's how we got

[00:03:56] connected. I think what you do is fascinating with renting planes and selling planes and

[00:04:01] doing pre-sale or pre-owned sales of the Vision Jet in Cirrus so anyway Luke give us a little

[00:04:07] bit of your background. Yeah well I love to hear your story that you're using GA in the way it

[00:04:12] should be for your business you know we were talking a little bit before the show about

[00:04:15] the personal trips and you know that's why we get into aviation and do those things.

[00:04:20] My background in boarding race Seattle guy not sure what I wanted to do professionally my

[00:04:25] uncle was a pilot for UPS had a good living lived on a lake got a bunch of ski days in so

[00:04:30] as I was kind of floundering around in college I said I'll be a pilot and I went to the

[00:04:35] local airport and soloed and I said okay this is what I'm gonna do so I went to flight school and I

[00:04:40] got my certificates but I had to get a four-year degree at that time so in fact the University

[00:04:45] of Washington while I was doing that I was instructing at Boeing Field and they just

[00:04:49] happened to have five cirruses on leaseback which is the thing we're going to talk about

[00:04:53] at a time when there was only 300 cirruses that existed so I got a really big head start

[00:04:58] on the Cirrus world and from there I got hired and went to Duluth Minnesota

[00:05:03] this has to be some reason to go there and uh it was for Cirrus aircraft and I had this amazing

[00:05:09] job people would buy brand new airplanes they were small business owners they were you know

[00:05:13] executives at companies and I would deliver the plane from Duluth to you know Santa Monica

[00:05:18] California to Jacksonville Florida to York Pennsylvania all over the country and I went

[00:05:23] from 800 hours to uh 2000 hours in a year it was a great job and then you know life

[00:05:30] happened I met a girl back home sort of thing well I knew it for a long time actually but

[00:05:34] anyways we got married and moved back to Seattle we started doing it there and building our business

[00:05:38] and that turned into aircraft rentals and flight training and doing adventure trips

[00:05:42] and then that turned into selling airplanes and kind of staying in the Cirrus ecosystem and just

[00:05:47] trying to provide services to really you know people that could own airplanes and um

[00:05:54] just had a great time doing it ever since so I think what's really cool is that

[00:05:58] I grew up in the traditional part 61 flight school where you know 172s, 152s,

[00:06:04] you know a lot of airplanes, a lot of volume of of students just kind of like passing through and

[00:06:08] you're just you know you look at the schedule and you're doing you know six seven eight lessons a day

[00:06:12] you know and you do a little bit of ground school a little bit flying and so if you're

[00:06:15] thinking about like an instructing career this is I think the Cirrus lifestyle or they

[00:06:19] call it the Cirrus life is kind of fun because you know you're you know talking to your

[00:06:24] instructors you know they when I was getting checked out you know they're like yeah well

[00:06:27] we do it a little bit different you know we will actually fly the airplane to your location so like

[00:06:33] they'll go you know fly the airplane from Renton down to Bend you know for a few days and actually

[00:06:39] train somebody on site that's taking delivery of like a Cirrus SR 22 so they kind of fly like

[00:06:46] all over the country to really cool places and meet with people to train them up and

[00:06:51] I think that's a really a that's kind of fun for the instructor to build their hours that way

[00:06:55] way more fun than I think you know some of the things that we did which is like how many

[00:06:59] times can you go on the go around the the flit VOR you know and you know they get said they

[00:07:04] get to go to different places they kind of get that other cross-country experience

[00:07:08] and they're flying a great airplane and so yeah we're there that's amazing and we're gonna

[00:08:03] we're gonna unpack like all the things behind the curtain on this podcast which I think

[00:08:09] is gonna be really fun because there's a lot of crap loaded questions but take you're dying to get

[00:08:12] into yeah so Luke and I were we're talking before the show and I just want to preface this show

[00:08:17] this episode with you know the idea here is hey let's talk about GA and let's you know we've been

[00:08:24] we've been witnessing incredible run-ups in the wealth and the incomes of airline pilots

[00:08:31] and there's so many airline pilots that haven't touched GA in 10 20 years

[00:08:35] and Ryan and I both get to play in the space it's amazing I just put 11 and a half hours

[00:08:40] on the bonanza a few weeks ago we went all the way up through Sun Valley Idaho and up to

[00:08:46] Cortalaine for a wedding and and then put it back to bed in the Bay Area and it's just so

[00:08:53] fun flying into these small airports you forget how easy it is you walk in you sign your name

[00:09:00] they take a photocopy of your driver's license that's your rental car even easier if it's a

[00:09:05] crew car I mean it's just so much fun if you don't remember the joy of general aviation

[00:09:11] we're here to remind you of it and to talk a little bit about the business aspects

[00:09:16] the passive income potential and the tax depreciation potential of aircraft ownership

[00:09:22] so that's what you're in store for today absolutely yeah so I guess let's let's go one by one so

[00:09:32] the planes that are at your flight school in Renson my understanding is that

[00:09:38] Luke you don't own there were maybe you own maybe you do but who owns those airplanes and

[00:09:42] who's benefiting from this flight school yeah we do own some of them but why we have a

[00:09:49] leaseback program or a marketing arrangement you know because that's what's required to meet

[00:09:54] the rules the taxes but one of our customers for example is a surgeon in Seattle a private pilot

[00:10:02] and he certainly flies his plane I'm not sure the hours man let's call it 50 70 hours a year

[00:10:08] and the plane is on leaseback with us and we then have it for rent and for flight training

[00:10:14] we're a little bit different program in that all of our aircraft are serious and they really are all

[00:10:20] late model you know our business model is to have two years under a thousand hour aircrafts

[00:10:25] so we're really providing a high-end product for people that can afford to rent that and want that

[00:10:31] and maybe it's a gateway into ownership or maybe they just rent and keep enjoying that style and

[00:10:36] you know put off some of the challenges that ownership has but that is a renter you know

[00:10:41] another gentleman who's owned several small businesses and one of the things he does is

[00:10:47] use the airplane to get back and forth to do look at properties to look at maybe warehouses

[00:10:53] and then the rest of the time we're able to use that plane for a rental fleet or for flight

[00:10:57] training that's great and so I think that's the mystery we want to solve today right we

[00:11:02] want to talk about you know okay you have these people that are light use on the aircraft

[00:11:07] and you know I want to unpack the benefits of giving it to the flight academy to rent out to

[00:11:14] other people um you know and and it sounds like you do the whole thing you're doing the maintenance

[00:11:20] on the plane you're you've got a home for it on the ramp um you know what other benefits to that

[00:11:27] owner do they have yeah we try to make the experience turnkey obviously they're paying

[00:11:33] for the aircraft but we set up you know we have a group insurance policy we take care of the storage

[00:11:39] of the aircraft we manage it in terms of getting it for maintenance making sure the databases are

[00:11:43] updated leaning all the things that requires to make the plane useful and in our particular way

[00:11:48] we talked about where we kind of do concentrated flight training accelerate if you will is that

[00:11:54] someone comes in and they say hey I'm going to use the plane for this week and we're going

[00:11:58] to hit it pretty hard but then that means it might be available the next week for the owner so we have

[00:12:03] an online scheduling tool and we kind of make sure they understand how we work where most flight

[00:12:09] schools are doing two hour blocks of time and they're just doing that forever that's not our

[00:12:13] program um we kind of talk to our people about putting making the spreadsheet work with about

[00:12:18] 30 to 50 hours of rental a month and sometimes you know we're here in Seattle summer that

[00:12:24] peaks up and the winter it slows down but they're really turnkey they just get to buy the airplane

[00:12:30] and then we take care of all the stuff it's there for them when they want to fly it

[00:12:33] and do they make any profit on that that rental you know that's a good question um the planes

[00:12:40] do cash flow uh for the owners but there's some other costs if we're being clear about depreciation

[00:12:47] where it's not necessarily a great ROI on your money so when you when you buy the plane

[00:12:52] it will you know cover the mortgage it will cover the maintenance it'll cover the insurance

[00:12:56] but then when we add in depreciation you're you're at a little bit of loss so it really is for someone

[00:13:01] that's looking for the tax side of it plays a huge role in wanting to do this let's talk about

[00:13:06] that yeah sure then just to clarify real quick before we go too far because it's depreciations

[00:13:11] like kind of a new concept I think for a lot of our listeners you might actually be on paper

[00:13:16] a cash in pocket is what you're I think you're saying but on your tax return you may be showing a

[00:13:23] loss or are you actually talking about the physical depreciation of the airplane well there's both

[00:13:28] kinds and both are real so certainly let's just talk about the first part you know you've got your

[00:13:34] monthly bills that come with the airplane and you get your cash flow and I think at the end of

[00:13:37] the year that's probably about a net zero so that kind of covers everything but aircraft typically

[00:13:44] are a depreciating asset so that means as we put hours on it as you put hours on it it has less

[00:13:49] value when we sell it to the next person that doesn't come off every year you know you don't see that

[00:13:55] until you actually go to sell the aircraft so there's real asset depreciation and its value

[00:14:01] and then there's the part where it becomes the investment side is the bonus depreciation we've

[00:14:06] had have some nice laws and we've have had for a lot of years and they've kind of changed

[00:14:10] things and they his Congress going to reauthorize them but both under Democratic and Republican

[00:14:15] presidents they've existed and as we sit here in 2024 and as an aircraft salesman my phone's

[00:14:21] getting busy on the pre-on side there's 60% depreciation in the first year on owning an aircraft

[00:14:28] and that's something that's driving a lot of buyers we always see busy December's because

[00:14:33] of that yeah we see the same thing in real estate people hey what do you got you got something

[00:14:38] to buy to get something to invest in before the end of the year because they can look backwards

[00:14:42] on the tax year and say I've had all these gains what do I do about that and sometimes buying

[00:14:48] an airplane or buying real estate and the final month of the year will give you that tax

[00:14:54] shield against what you've made throughout the year so as a strategy as an investor if

[00:14:59] you're listening to this you're thinking hey I've sold a bunch of rental properties this

[00:15:02] year and I didn't do a 1031 exchange which we talk about on a different show

[00:15:08] what do I do well the answer could be to invest in something right and you know in this case

[00:15:14] we're talking to look about buying airplanes but buying airplanes or buying real estate will give

[00:15:18] you that taxable shield against any potential gains that you have you mentioned 60% I just

[00:15:23] wanted to clarify the 60% and maybe we unpack that so let's just say it's a million dollar

[00:15:29] airplane that you buy what do you think in this tax year if you if you sold a pre-owned you know

[00:15:34] I don't even know if you get a pre-owned uh two-year less than two-year old serious for that much money

[00:15:38] but let's say you're getting a a million dollar airplane how much tax break would would somebody

[00:15:43] expect to get dollars wise yeah I mean there's a lot of nuance in there about what comes

[00:15:50] through on your taxes w2 versus you know k1 and those sort of things but the 60% tax

[00:15:58] benefit so you get to write off the $600,000 of your income in that case and so you know you

[00:16:05] you profited you've got a profit of $600,000 now it's zero so now your tax basis is zero

[00:16:11] and next year that's going to drop to $400,000 right 40% that's right but it's the bonus

[00:16:20] depreciation part it was not too distant past where you could do 100 bonus depreciation

[00:16:26] that was even a tax year thing and then it went to 80 not 60 and you know this is something

[00:16:31] get ballied around back and forth in congress and has had different different things but

[00:16:36] it's certainly been advantageous to aircraft owners now you get the $600,000 right off this

[00:16:42] year but you also get the $400,000 to depreciate over a certain span of of life right so the

[00:16:52] $600,000 you get in the first year because that's bonus depreciation but you still get the benefit

[00:16:57] of the $400,000 that you didn't depreciate in the first year right it just happened slower

[00:17:03] that's right I mean you can fully depreciate the asset over five years the traditional

[00:17:09] depreciation is 20% a year so you just get to accelerate that in the first year

[00:17:13] and then you work the rest out over time something to clarify is you do have to have

[00:17:17] the plane linked to a business it can't just be your private aircraft so you that's where the flight

[00:17:23] school and the lease back comes in as helping to facilitate that bonus depreciation if your

[00:17:30] business is such that you need to travel and you can say the aircraft is required for the travel

[00:17:35] then that's helpful and even learning to fly the aircraft is an act that can be

[00:17:40] written off and put towards those hours but you know if you have if you don't have a

[00:17:45] business that requires an airplane then you have to find a way to do that and putting into the flight

[00:17:50] school is that way that that's a really good point so I think we talked about this before which is

[00:17:59] you know that's a really good point when we talked about this before I think

[00:18:02] you know you it's like okay where I'm not gonna I'm gonna you basically said at the beginning

[00:18:06] of the show we're gonna break even here what's the what's the advantage well the advantage is

[00:18:10] Luke and his team are gonna take care of your plane

[00:18:14] and you're gonna have a place to put it and you're gonna have the maintenance done

[00:18:16] and you might net zero at the end of the year maybe you have a banner year and it flies a lot

[00:18:20] you make a little bit of cash flow but your big benefit is that you've put it into operation

[00:18:25] you put it into service so that you can take that tax break that Luke was talking about

[00:18:31] is there a certain the end of the year yeah just starting this is say the end of the year

[00:18:35] is interesting because you know you only have to have it in service for one flight

[00:18:39] potentially and you get the whole year's benefit so um you know that's that's a really nice thing to do

[00:18:46] is we get while there's less you know the requirement is even less say that again because I think it's

[00:18:51] gonna be hard to I've had my message sorry guys you're gonna have to worry no my message is off

[00:18:57] on my computer and they ding over here so I apologize no to say that again I just don't

[00:19:02] want to get that to come through yeah yeah so we'll cut that we'll cut that out and we'll redo that

[00:19:07] what do you say in terms of linking into a business you know you have to have a certain

[00:19:12] amount of usage has to be business versus personal and so if you put the plane in at the end of the

[00:19:16] year and only do one flight that counts for the whole calendar year 2024 you could say 100%

[00:19:23] of my business use in 2024 100% the aircraft use in 2024 was for business if on December 30th

[00:19:30] or 31st you did that one business flight and then that would count against any income for

[00:19:34] the whole year right and this is exactly like when you buy a short-term rental you know you scramble to

[00:19:39] get it ready and listed you get your first short-term rental tenant in there on on December 30th

[00:19:45] and you get the you can do the cost segregation bonus depreciation for the entire calendar year

[00:19:50] and as a reminder we're not giving any tax legal or investment advice do your own

[00:19:54] due diligence and consult with your tax and legal team before yes doing into these strategies

[00:19:59] this is just a friendly conversation Luke does this take the tape and I do this personally

[00:20:04] not I don't own an airplane but just you know just know that these strategies are out there and so

[00:20:11] you know I mean think about this this is you buy an airplane for a million dollars you get the

[00:20:17] 600k right off put it in service for a very very short period of time and then you pull it

[00:20:21] out you you still benefit from that right off you're not going to have to burn it back in

[00:20:26] and then you know you can decide if you want to keep it in rental service or not

[00:20:30] you know this is a massive strategy that that people do and you know Tate I've even talked to

[00:20:37] a CPA that told me that you don't even have to give it ready for rental service necessarily

[00:20:41] you just have to have it offered out to the public you don't even need to ten it in it

[00:20:45] yeah that's that's uh that's the feedback we've gotten from CPA teams is is it you know the

[00:20:50] definition the IRS definition of placed-in services that it's being advertised and it's

[00:20:54] available you wouldn't even need a tenant in that in that short term rental

[00:20:59] so Luke what do people typically do in your flight school they typically buy a brand new

[00:21:07] serious entered into service read it out for a couple years what what's the typical

[00:21:12] you know avatar of someone that that buys a plane and gives it to the flight academy to read

[00:21:17] yeah I mean that's our model so we are a little different we're a boutique flight school and

[00:21:22] we do kind of deal with people that have the means and the interest in flying a serious so our model

[00:21:28] is brand new aircraft and we have them for about two two years less than a thousand hours and we

[00:21:34] want to turn them over because we just want to have the latest and greatest serious just

[00:21:38] changed their airplane they now have a generation seven so we're in the process of changing our

[00:21:42] fleet from generation six to generation seven so our clients you know seriously done a great

[00:21:47] job of bringing in non pilots non aviators into this so 40 percent of new aircraft buyers for

[00:21:54] serious are not pilots previously and so not only do they need to learn how to fly but they need

[00:21:59] to learn how to own and operate and manage the aircraft it's you know it's not something that

[00:22:04] people have a lot of experience with so our buyers are successful individuals and other walks of life

[00:22:12] entrepreneurs executives of businesses around here we have a lot of amazon clients Microsoft

[00:22:16] clients but we also have a lot of small business owners doing you know i'm always amazed at what

[00:22:22] people are doing there from storage units to CBD oil to uh traditional stock brokers and doctors to

[00:22:30] butchers i mean we just have all kinds of people and so they say hey i know how to do that i like

[00:22:36] flying i'll buy the airplane put the plane in your flight school you guys manage it you guys fly

[00:22:41] you send me a check at the end of every month and then that's how it's going to happen i love it why

[00:22:47] why cirrus do you think well what's so popular about this plane well i couldn't be more biased

[00:22:54] i mean i have about 12 000 hours flying cirrus so that's they like if you cut me open it

[00:22:58] bleeds out but i think the safety features appeal uh very much every airplane has a parachute on it

[00:23:04] we've got big modern displays so that the screens are easy to read and easy to operate the

[00:23:10] interiors based on a BMW but it just kind of feels right you go out to the airplane it's nice

[00:23:16] it's clean you can take your family and friends you know the flight school i first went at had

[00:23:21] the 172s with the stop drilled tracks and had to explain to people why that worked or

[00:23:25] different things so it's a modern aircraft the safe airplane and and it actually can get you

[00:23:30] places from here you want to go to sun valley two hours of 15 minutes cool you're in sun

[00:23:34] valley want to go to san francisco three hours so yeah i can you know it's funny when uh you know

[00:23:41] i'm thinking about this and and the parachute thing is a funny thing for airline pilots right because

[00:23:45] you know as an airline pilot you're like ah these things like taking up space it's a gimmick

[00:23:49] it's like i don't need a freaking parachute right but i'll say we're flying the bans around and

[00:23:54] my wife lucy is going hey what happens if you pass out like how do i land this thing and i'm

[00:24:00] like all right so you got your prop knob here you got you got mixture you got the flaps here

[00:24:04] you got to put the gear down you got to do this you got to do that you got to do that and she's

[00:24:08] like there's no way and i'm like actually yeah you're right there's no way uh there's no way

[00:24:12] because too fast heavy complicated an airplane for her for her to land with no flight flight experience

[00:24:17] so even if you are a very experienced pilot it actually is comforting for your passengers

[00:24:22] no they can just pull a big red handle and i mean we've come a long way in the 20 plus years

[00:24:28] that cirrus has been producing airplanes and we've got 129 parachute poles 265 saves

[00:24:35] and you know an airplane crashes are usually pretty messy affairs and these things are

[00:24:40] let me give you a Tylenol and a band aid it's pretty cool yeah that's amazing my wife and the same

[00:24:44] thing we were flying from here to sun river or again and uh we're going over about about

[00:24:50] when your national park area and you know we're in a 182 and she's looking down so what

[00:24:55] we lose an engineer is like probably get tangled up in the trees and hurt pretty good

[00:25:02] so she loves the cirrus and and uh and it's a great plane for that can we break down let's just say

[00:25:08] and i'm not going to get into numbers and what the hourly rates are and things like that but

[00:25:12] if the plane was $100 to red which is a lot more than that but if it was $100 an hour to rent

[00:25:18] how much or maybe as a percentage um you know if i if i bought a cirrus and i put it in your

[00:25:23] fleet what's the breakdown and cost and you know if someone came in and rented it for an hour

[00:25:29] what's going where and what's paying for what yeah so let's assume that the fuel and any

[00:25:36] consumables because we do a consumables rate so if it's just the hundred dollar is the

[00:25:40] income for the airplane what we do is we have a 70 30 split with the owner and the flight school

[00:25:48] and so the owner of the aircraft covers the obviously the mortgage of the airplane they cover

[00:25:56] the insurance they cover the tie down they have the the costs are are borne by the owner

[00:26:01] and then we manage the plane and we market the plane we get it out and bring the clients in for our

[00:26:05] percentage got it so just to be be clear so they're renting the the spot and then they're

[00:26:13] paying the mortgage they're paying the what was the other thing you said the maintenance

[00:26:17] insurance insurance okay yeah i mean it's really simple we go there but all of the expenses of the

[00:26:24] aircraft are the owner's cost but we handle everything for them so they don't have to do anything so we

[00:26:32] schedule all the maintenance the cleaning we provide the tie down space there is a

[00:26:36] fee from the tie down space but they're pretty hands off in how anything now they

[00:26:40] they actually can be as hands on as they want to be in this example but typically we

[00:26:45] take care of everything for them you know what is that expense amount you think as a percentage

[00:26:49] how much do you think if i if the rental rate was 100 bucks is it 60 or 70 i guess the mortgage

[00:26:55] it will put the mortgage aside because that could be a rate and how much you put down and all this

[00:26:59] stuff let's just talk about maybe maintenance the tie down and we're not talking about someone

[00:27:04] slamming the prop in the ground or some crazy you know situation where you got a rinse

[00:27:09] claim well i mean i go back to the top it really at the end of the year year that really isn't a lot

[00:27:15] of cash flow on it because those expenses and insurance is probably the largest one in

[00:27:20] where we are in the pacific northwest real estate or airplanes pretty hard to come by so that's

[00:27:25] a that's a big expense also um so it kind of it kind of washes out there's not a lot left over

[00:27:33] for the you know the ROI and as i was having say to people if this was such a great cash flow

[00:27:39] business you'd probably see sears is all over the place but where you have to be able to do is find

[00:27:43] that tax benefit that bonus depreciation where it really comes in the other thing to think about

[00:27:49] i guess is if you want to make flying pretty much zero cost for you you can do this investment

[00:27:55] and then you are getting your 50 hundred hours a year kind of covered by the rental of the

[00:28:00] aircraft oh really so you would probably use so the that's kind of the how you pencil it right so

[00:28:05] if i'm going to fly a serious for 50 hours a year and i buy one i'm basically just going to cover my

[00:28:09] costs and that's that's i mean that's pretty significant i mean these rates are 500 for the

[00:28:15] non-turbo less or 20 to 800 bucks an hour maybe so i mean that's not an it's 40 50 grand

[00:28:23] so it's they know not insignificant yeah that's right i mean you have to keep in mind that the

[00:28:29] planes that we have on rental the sr 22t the g7 is a 1.25 million dollar airplane the g7 sorry the sr

[00:28:37] 20 g7 is a 750 thousand dollar airplane though they're you know those are those are getting up there

[00:28:44] so what i love about this is is it's unlocking you know we're all about unlocking ideas on this

[00:28:50] show and getting people to think different ways so what the traditional way of thinking about

[00:28:54] aircraft ownership is okay a serious cost one 1.25 million dollars i need to go i need to be able to

[00:29:01] afford a 1.2 million dollar airplane before i can afford to buy it right but what we're saying here

[00:29:06] is hey this is a different way of thinking about it maybe you know you you don't need to be in that

[00:29:13] sort of financial position you don't need to be that far up the wealth ladder to do this

[00:29:19] you could buy it you can put it into a lease pool you can take these these incredible tax

[00:29:22] benefits and you you get to have your cake and eat it too right so um figuring out these creative

[00:29:29] ways to to leverage tax benefits and to leverage the joy of ga without without having to just buy it

[00:29:38] outright by yourself yeah one thing i wanted to clarify too that 600 thousand dollar deduction

[00:29:45] you talked about if i'm an airline pilot can i deduct that against by w2 how does that work

[00:29:51] you know luke well you have to you certainly can deduct it off your bottom line income for sure but

[00:29:58] you you have to have a the plane has to be in the furtherance of a business so that's why it has

[00:30:04] to be linked to the flight school because on your own you can't ride it off against your w2 income

[00:30:10] exactly but it yeah you would have to get to the outskill exactly and then the pilot

[00:30:14] 30 to 37 percent tax bracket right so now i mean 600 thousand dollar write-off i mean that's

[00:30:23] huge that's a lot of money right and uh and you get the benefit of flying it because we all love

[00:30:28] doing that and you get to go on fun trips and well and to be clear though it does not sound

[00:30:33] like you can write it off against your w2 right because you would have to materially participate

[00:30:37] in the in the lease pool in that business so if you owned a business on the side

[00:30:42] and you bought the aircraft for the furtherance of that business that you materially participated

[00:30:46] in then it would be an active write-off uh that's the way i understand is that the way you understand

[00:30:51] it luke yeah and so our lease back agreements are actually called marketing agreements and we've

[00:30:57] structured them such that the i know the name of the podcast is passive income pots but we

[00:31:01] structured them as such that the person who is the uh less or of the aircraft participates

[00:31:08] in that so we have them involved in a monthly meeting okay come down you know our setting helping us

[00:31:14] set the rates and so it becomes so it becomes active yeah so it's it's really not a lease agreement

[00:31:21] it's a marketing agreement and we have them connected to that so that they can participate

[00:31:26] that is fantastic deduction this is great yeah that's fantastic yeah yeah i mean so cpa involved

[00:31:32] obviously don't go into this blindly right yeah yeah well but yeah you know

[00:31:37] the thing that i wanted to talk about too is like okay so you're you're getting the $600,000

[00:31:42] tax break but you know math and public here is not my strong suit but you know 37% let's just say

[00:31:49] times 600,000 i mean you're talking about a $200,000 tax write-off let's talk about the

[00:31:55] financing on this plane i mean you what would you be what a tip of where do people typically

[00:32:00] go good financing what does that look like how much down payment yeah i mean it's it's fairly

[00:32:06] straightforward obviously rates are dynamic and have been high recilin are coming down but usually 20%

[00:32:12] down right now the rates are about 2% over the fed funds rate so you're in the mid-sevenths on

[00:32:20] those rates or the mid-sevenths on those rates and you know it's a 20 year term but it's a five

[00:32:27] year loan so you got five years and then you got to do a balloon payment you have to refinance or

[00:32:32] do something else but that's it we have special banks that specialize in doing aircraft financing

[00:32:40] or you cannot go to your private bank and they'll do that as well but they're not as

[00:32:45] experienced with airplanes so it can get a little messy have you seen groups of people come in

[00:32:51] like what if ryan and i wanted to say hey let's go 50-50 because we you know i neither of us

[00:32:57] want to buy the whole thing uh and would we both be able to get the tax write-off or or if three

[00:33:02] people or four people want to go in on on something like this yeah that's that's a great question

[00:33:06] we definitely do have uh well shouldn't set the flag again but people do buy these aircraft in

[00:33:12] partnerships and and spread the tax benefit around you know the the i will admit that the

[00:33:20] how that actually works a little bit above my pay grade hey that's fine no do we just

[00:33:24] wanted to see if you had um if there were people doing it one big benefit i and you know i i would

[00:33:31] you know i i'm excited i'm like ready to buy a plane let's do this loop um you know after this

[00:33:37] alright here we go and by the way that's the guy you talked to you talked to luke and easy

[00:33:42] he's got the connection so um i mean a million dollar airplane i have to put down 200k he said

[00:33:48] 20 down i'm getting a 222 000 tax deduction at the same time so you're you're effectively giving me

[00:33:56] a tax break in the amount of my down payment and then i'm break even and then i get to fly the

[00:34:01] thing 40 50 hours a year and one more one more benefit to that i think is um you know typically

[00:34:08] you know when you rent these planes every flight school has an overnight minimum

[00:34:12] right every flight school is going to say you know you got to put two hours on the plane to

[00:34:17] overnight at yada yada yada eight hundred dollars an hour for this plane i mean you you're not going

[00:34:24] on a you know that's gonna add up pretty quick just in the downtime of the airplane the minimum

[00:34:29] overnight so would it be by understanding if i owned the airplane and i wanted to take it for a week

[00:34:34] and i put an hour on it i probably wouldn't have to pay the overnight minimum to myself right

[00:34:40] is that was that is that true or how would you structure that what yeah i mean you know we

[00:34:46] are a small business so we're willing to work with people on things but how it works is the plane is

[00:34:52] owned in a single purpose llc so if you own the airplane ryan you don't actually own the airplane

[00:34:58] you know ryan's aircraft ownership llc owns the airplane and so then they lease it to the flight

[00:35:04] academy and then the flight academy rents it to you ryan so you would pay us the income and then

[00:35:09] we would pay your llc out of that right um now would we relax the rules for the owner of the aircraft

[00:35:16] of course we would yeah but um that's something that's not you know that's not a federal law or

[00:35:22] the f a tax thing or irs taxing so if you want to take your own airplane you're one of our

[00:35:28] customers that has the lease back with us take it whenever you want yeah just provide a little

[00:35:33] more flexibility just i do remember uh that we were talking to i think toby mathis about

[00:35:40] how to put an aircraft in a lease lease back pool and take the depreciation one of the key

[00:35:46] things that he pointed out was that you have to lease it from from yourself essentially at market

[00:35:52] rate um so that's right that would make sense that you would actually have to you got to rent

[00:35:57] but of course the terms might be flexible you got to rent it at the price that we have out there for

[00:36:03] the public and you're going to rent that but we could let you take it overnight on one hour

[00:36:07] instead of two hours something um i think you know where the conversation should go on i don't know

[00:36:12] if i'm interjecting too early is that this bonus depreciation is great and it's something that

[00:36:17] sells a lot of airplanes and a lot of people take advantage of it but at some point when

[00:36:23] you sell the airplane you get recapture and so the recapture is sort of the medicine that

[00:36:28] is the the stiff medicine so what a lot of people do is they just keep buying a more expensive airplane

[00:36:35] and rolling over their recapture and if you do it in the same tax year you sell your recapture you

[00:36:40] buy again then now you continue the process and that can go on you know as long as you want to

[00:36:46] keep playing it but at some point you will you will still have to you know pay that tax

[00:36:53] and what's great is like you know that benefits the renters you know i noticed the flight academy

[00:36:58] i joined i think a couple years ago to start running the cirrus is there and it's like

[00:37:02] i showed up these planes are brand new and then all of a sudden like you know this year i've

[00:37:08] noticed the planes are becoming more bright because you're kidding yeah getting g7s right so like

[00:37:12] this is good for the flight school it's good for everybody because now planes are brand new

[00:37:17] they're getting turned over people are getting the tax break this is what the government does

[00:37:21] in the tax code they are trying to incentivize you and they're trying to incentivize your behavior

[00:37:27] to stimulate the economy right so you know tax code you know we talk about this on the show

[00:37:34] all the time like the tax code isn't written on how to pay taxes the tax code is written

[00:37:39] on how to take tax breaks right the the government writes incentive to promote activity right so i know

[00:37:47] people are always like oh is this going to make me get audited and all this other stuff and it's like

[00:37:51] these things are are structured to benefit people who are investing in planes investing in economy

[00:37:57] investing in manufacturing right this is the incentive so it makes sense like wow is probably

[00:38:03] pretty good for the economy that somebody buys a new airplane every year or every other year so

[00:38:07] that's why these tax breaks go but one thing i also wanted to clarify is if you sold a brand

[00:38:14] new airplane or bought a brand new airplane you get the depreciation but if you also bought an

[00:38:17] old airplane you would still get the depreciation based on the dollars that you paid for it or

[00:38:23] is it your understanding that was 100 correct yeah it works for both new and pre-owned aircraft

[00:38:28] and that's a function of the tax cut and jobs out of 2017 which in this form of bonus

[00:38:34] depreciation which was 100 for five years and now is is sunsetting by 20 per year currently at 60

[00:38:40] percent 40 next year it applied to pre-owned assets which was not a characteristic of bonus

[00:38:50] depreciation in current form sorry in previous forms right the amazing thing is you could buy

[00:38:56] a used airplane you could still take bonus depreciation didn't have to be a brand new

[00:38:59] asset so that's a great point yeah that was a change and it spurred a lot of activity sure did

[00:39:06] yeah so just just to make sure that people are following along with this so if you bought a

[00:39:11] million dollar plane you're going to get a 600 000 right off in the year that we're

[00:39:16] filming this in 2024 then you're going to have 400 000 left over to deduct and you're going to

[00:39:24] get 100 000 a year because you've already gone through one year and then you get the additional

[00:39:30] 100 000 per year in the four years that remain in the depreciation so yes you get it you get a huge

[00:39:37] tax break in year one but then you also get a hundred thousand dollar tax break in years two three

[00:39:44] four and five right so how we how we sound spot on yeah so again you're getting that 220 000

[00:39:52] break in the first year but the second year if you're in the 37 percent tax bracket you're

[00:39:56] getting 37 k 37 k 37 k savings on taxes while you break even on the plane assuming right and you get to

[00:40:03] go fly it now the the recapture tax um i i on my understanding you know everybody kind of gets

[00:40:11] afraid of recapture but recapture is typically done at a flat 25 percent isn't that your guys's

[00:40:18] understanding i think it's actually done out here at your tax rate but okay it's only what

[00:40:25] you know if you fly the airplane let's say you bought that plane at a million dollars and it was

[00:40:30] actually worth 700 000 when you sold it you you've depreciated 100 so that 700 000 is now all

[00:40:39] profit or all to the bottom line but you're only paying tax on that amount not the original amount

[00:40:44] got it i see gotcha so it could be it could be slightly in adventases depending on you know

[00:40:50] where you buying yourself but but what i mean there's gotta be an end of the cycle what happens

[00:40:54] is someone takes that 700 000 and then they go buy the 1.2 million dollar airplane

[00:40:59] and now they can ride off to 700 000 plus and keep going. That's exactly what i talk about in real

[00:41:05] estate being a lazy man's 1031 it's like as long as you're taking those proceeds and you're rolling

[00:41:10] them back into uh real estate or other assets that provide fresh depreciation benefits it's like

[00:41:15] you can you can offset those gains in perpetuity as long as you're continually

[00:41:19] investing that those proceeds back in which is the idea that's what the IRS designed it for.

[00:41:27] Yeah, let's switch gears to the purchase of the plane what's the wait list like where do you find

[00:41:33] these things what's it like working with you Luke how long does it take you know kind of go over

[00:41:38] kind of like kind of a overview of that yeah thank you new aircraft are produced by Sears

[00:41:44] are the ones that i deal in Sears aircraft and they have a two-yearish backlog i mean that kind

[00:41:50] of ebbs and flows a little bit but they're doing a great job on their marketing and on the new sales

[00:41:54] so that's about a two-year backlog to get those aircraft free owned airplane are you know readily

[00:41:59] available on the market there's there's kind of the biggest place where everyone puts them

[00:42:05] on controller.com i broker planes with arista we have arista.com and what it what it goes

[00:42:12] like is typically someone calls me up and they tell me what they're always start with what's your mission

[00:42:16] what do you want to do with the airplane do you have to go somewhere because that's going to tell us if

[00:42:19] you need a turbo do you need a 22 a 22 t a 20 what are you doing with the airplane so let's find a

[00:42:25] plane that actually fits what you want and then we talk about the features do you need anti-icing

[00:42:30] or you know air conditioning do you want oxygen what what is it that you want

[00:42:35] where's your price range are we gonna buy an almost new one-year-old plane are we

[00:42:38] gonna go look back 10 years and find one with a little more hours on it anyways so we understand

[00:42:43] what the person wants with their price ranges and then we go find them an aircraft that meets their needs

[00:42:48] the process can take several months or if someone's on it we can do it probably in three weeks

[00:42:53] and so we locate the aircraft we look at the log books we negotiate a price we get it in for an

[00:43:00] inspection we deal with them getting the plane you know get them set up with insurance get

[00:43:04] them set with financing and then obviously that goes through an escrow process just like a home

[00:43:08] and you close the airplane switch the ownership and once again another thing on the taxes is part of

[00:43:13] it is where do you close the aircraft you're gonna close it in Oregon Montana you're gonna

[00:43:17] get it out of California most people do that kind of stuff so there is some

[00:43:23] there's you know there's some skill to doing it what state's the best state

[00:43:28] wow that that's it depends on a lot of factors so for example Oregon is a no sales tax state so

[00:43:36] people in our part of the world say oh let's close in Oregon well if you live in Washington we have

[00:43:40] a use tax which is the equivalent of sales tax so there's really no getting around it um

[00:43:45] there are some tax states we're closing an airplane in South Carolina I believe they

[00:43:50] have a $2,500 use tax uh there's things like a casual sale or you can board it all together

[00:43:55] so it really depends on where will the plane be based and where's your principal ownership

[00:43:59] some people have houses in two states and where do they say they live so it gets complicated

[00:44:04] and back to your disclaimer I would I would recommend hiring a tax professional right there

[00:44:08] are guys that specialize in aircraft taxes what is the biggest mistake or most common

[00:44:16] misconception that people have when they're buying their first airplane

[00:44:21] well that's that's a good question um you know I think people don't appreciate what their mission is

[00:44:28] so they will they'll not realize how much they can fit it into their lifestyle actually or

[00:44:34] how much they're gonna like it so a lot of times it's not a common for someone to buy an SR20

[00:44:39] which is the smaller engineer plane and they jump in it and they doing a few things and then

[00:44:44] they realize they want they want to be able to go over the mountains in the winter time

[00:44:48] they want to take two other you know another couple with them somewhere and so they buy too small

[00:44:54] they don't buy big enough um and then I think probably realizing for most of the people

[00:45:02] that we deal with that it is there is some workload to owning an aircraft and managing

[00:45:06] it making sure it's maintained properly and updated and so forth and so not getting

[00:45:11] the support help after they purchase makes a lot of sense well that's great you know this has been

[00:45:19] you know eye-opening for me and I think her listeners are gonna love this one um Luke

[00:45:25] you know thank you for your time can you tell us how do people get a touch with you you know

[00:45:29] how what's the next step what website what what's your email address what what's the best way to

[00:45:34] know yeah awesome I appreciate you giving me opportunity yeah um I wear a couple hats I own

[00:45:38] the flight academy we're a flight training organization where you write your airplane from

[00:45:41] and we do these leaseback deals and so we're at Renton Field but we travel the country and that's

[00:45:46] the flight academy dot com I'm Luke at the flight academy then I put on my aircraft sales hat and

[00:45:52] I work with Arista uh they're a sales organization that specializes in Sears aircraft we do sell

[00:45:58] others and um so if you're interested in the pre-on brokerage side that's arista.com

[00:46:02] a-e-r-i-s-t-a dot com and I'm Luke at Arista but I'm sure there'll be something in the show notes

[00:46:09] and I'd love to talk to anybody about this and this way I do I spend my time talking airplanes and

[00:46:15] you know when I'm not talking to them I'm meeting you up in the San Juan Islands on

[00:46:18] there on the ramp flying around so I'm pretty passionate about it yeah it was funny Luke and

[00:46:23] I um you see I was flying up to a real estate conference up in Antiquarta and uh the weather

[00:46:29] went down to minimums and uh it's out of the red well pretty close to minimums and then that's

[00:46:34] a little shout out for Osiris I mean I you know I have 10,000 plus hours you know flying the airlines

[00:46:38] but man I would it's the only single engine that I would take down to minimums and you know

[00:46:44] any day of the week I mean the technology I mean based on my experience again I'm not giving

[00:46:48] advice to anybody out there but you know the the technology on the plane and the instrumentation

[00:46:54] the way it's all laid out it's just a great plane for missions and you know and getting the ground

[00:47:01] speed and the um the icing protection and the altitude and they've really just thought of everything

[00:47:08] and the safety features with that with the parachute and everything it's a great

[00:47:11] great plane to be towing around in but Luke and I got caught up on the FBO and you know

[00:47:16] I thought hey you'd be a great guest for the show and we'll unpack all this stuff so

[00:47:20] thank you so much for coming on. I'd be here thank you for the opportunity.

[00:47:25] All right on to the next show. Take care Luke. See you.