Capital gains on personal aircraft sale

Discussion in 'Flight Following' started by RickC, Apr 25, 2022.

  1. SoonerAviator

    SoonerAviator Final Approach

    Joined:
    Jul 21, 2014
    Messages:
    7,478
    Location:
    Broken Arrow, OK

    Display name:
    SoonerAviator
    Well, I'm not talking about being in a tax haven necessarily. Just a simplified tax structure. No need for taxes on income and every other thing. Just taxes on what you buy new at a store. That alone would eliminate any tax loopholes, or tax avoidance strategies only available to the uber wealthy. It would avoid tax incentives for buying one technology over another, or one company/developer over another. It would also cut the IRS size down to almost nothing, as the only thing that would be needed is the staffing to manage the business reporting of sales taxes received and audit anything necessary. Hundreds of millions of tax returns for people and businesses would be eliminated. The overall taxes paid would still be about the same (unless you can get Congress to quit spending/printing money), but that's a different subject.
     
  2. WDD

    WDD En-Route

    Joined:
    Oct 16, 2019
    Messages:
    3,443
    Location:
    Atlanta / KRYY

    Display name:
    Vintage Snazzy (so my adult children say)
    Soon you'll have to pay taxes on gains even though you didn't and aren't selling anything......
     
    TCABM likes this.
  3. donjohnston

    donjohnston Pattern Altitude

    Joined:
    Aug 14, 2013
    Messages:
    1,730
    Location:
    Panama City, FL

    Display name:
    Don
    I always thought that the Fair Tax was a good idea. Not perfect. Then again, what is? But it would appear that it never gained any traction.
     
    RyanShort1 and SoonerAviator like this.
  4. SoonerAviator

    SoonerAviator Final Approach

    Joined:
    Jul 21, 2014
    Messages:
    7,478
    Location:
    Broken Arrow, OK

    Display name:
    SoonerAviator
    Agreed. The Fair Tax was a decent plan, but its main supporters at the political level were Libertarians and Independents, so it didn't gain support from the Bourgeoisie class as it probably would have taken away many of their tax advantages.
     
    RyanShort1 and donjohnston like this.
  5. WDD

    WDD En-Route

    Joined:
    Oct 16, 2019
    Messages:
    3,443
    Location:
    Atlanta / KRYY

    Display name:
    Vintage Snazzy (so my adult children say)
    Never thought I’d see “Bourgeoisie” in a post today.
     
    JoshN, Rich Holt and TCABM like this.
  6. Kevin Eggert

    Kevin Eggert Pre-takeoff checklist

    Joined:
    Feb 6, 2020
    Messages:
    112

    Display name:
    Kevin

    Anything that improves or adds useful life to an asset would be a part of the cost basis of that asset. I would argue that maintenance could be added to the cost basis of a capital asset if the maintenance expenses were not used as an expense in any other places. For instance, you had to repair or replace certain equipment during the plane's last annual. If this were a business asset, those expenses for maintenance would either be capitalized and depreciated or expensed through a section 179 expensing election. Either way, the maintenance expenses would be a deductible expense against income. As a non-business asset, the same mindset applies in figuring out what maintenance items could reasonably be considered as improving or adding to the useful life of the asset. I would personally take as many of these expenses as you can and add them to the cost basis when computing any capital gains. I would not worry about a penalty if you were to be audited as there is a reasonable expectation that these things should be considered in the cost basis.
     
  7. Mtns2Skies

    Mtns2Skies Final Approach

    Joined:
    Jul 12, 2008
    Messages:
    5,040
    Location:
    Wisconsin

    Display name:
    Mtns2Skies
  8. cmsuav8r

    cmsuav8r Pre-Flight

    Joined:
    Nov 7, 2017
    Messages:
    67
    Location:
    Colorado

    Display name:
    cmsuav8r
    Is the use of loopholes not living honestly under the government structure where you live? I'm not talking about doing things illegally and hoping to get away with it. Those aren't loopholes. There are many loopholes that can be legally exploited. As long as the government continues to find new ways to waste the tax dollars already coming in, I think it only fair that the citizens exploit the loopholes that politicians have allowed to exist.
     
    RyanShort1 likes this.
  9. GaryM

    GaryM Pattern Altitude

    Joined:
    Apr 16, 2020
    Messages:
    1,547
    Location:
    New Jersey (KMMU)

    Display name:
    Gary M
    Someone (don't remember who) once explained, only partly in jest, that as long as the government is spending $1.20 for every $1.00 they take in, the only fiscally-responsible thing for taxpayers to do is to stop giving them the $1.00
     
    Snowmass, RyanShort1, Old97 and 3 others like this.
  10. flyingron

    flyingron Touchdown! Greaser! PoA Supporter

    Joined:
    Jul 31, 2007
    Messages:
    22,199
    Location:
    Catawba, NC

    Display name:
    FlyingRon
    Not true. There are specific rules for such the life extension part. The usual extension yardstick is a year. You can't deduct stuff you have to do all the time (annual, oil changes). An engine overhaul on the other hand might be.

    But the starndard is certainly not "IF I DIDN'T EXPENSE IT" I can treat it as an increase in basis. While expensing it precludes you from using it as a capital improvement, the reverse is NOT true.

    Again, depreciation it the antithesis of increasing in basis. As a item is depreciated (or when it should have been depreciated), it is being consumed. This DECREASES your basis.
     
  11. Randomskylane

    Randomskylane Pre-takeoff checklist

    Joined:
    Jun 2, 2021
    Messages:
    184

    Display name:
    Randomskylane
    How can anyone have a gain after their first annual?
     
  12. chemgeek

    chemgeek En-Route

    Joined:
    Dec 5, 2009
    Messages:
    2,637

    Display name:
    chemgeek
    For most small aircraft with capable avionics and various STC upgrades (not repairs but value-increasing elecctronic, mechanical or interior upgrades), the cost of capital improvements plus the purchase price may likely far exceed the potential sales value. I' pretty sure I could claim a substantial capital gains loss on my airplane based on the purchase value of propeller, interior, engine, and avionics upgrades.
     
    Rcmutz and Randomskylane like this.
  13. wheaties

    wheaties Pre-takeoff checklist

    Joined:
    Jan 30, 2019
    Messages:
    349
    Location:
    NJ

    Display name:
    wheaties
    That only applies to the extremely wealthy. Or as one person put it, "Why are Musk's assets not 'real' for taxes but real enough to buy Twitter?"

    But seriously, talk to a CPA if its more than $5k. A 1hr consultation will cost less in the penalties and fines the IRS would charge.
     
    TCABM likes this.
  14. PaulS

    PaulS Touchdown! Greaser!

    Joined:
    May 29, 2007
    Messages:
    12,828
    Location:
    New England

    Display name:
    PaulS
    Yeah, just like AMT. :rolleyes:
     
    Jim K likes this.
  15. NealRomeoGolf

    NealRomeoGolf En-Route

    Joined:
    Apr 12, 2016
    Messages:
    3,656
    Location:
    Illinois

    Display name:
    NRG
    New cylinders wouldn't count. Neither would a new exhaust.
     
  16. NealRomeoGolf

    NealRomeoGolf En-Route

    Joined:
    Apr 12, 2016
    Messages:
    3,656
    Location:
    Illinois

    Display name:
    NRG
    It would generally be viewed as incidental maintenance for tax purposes. In business, you can't count partial replacement of a roof as a capital expense. You have to replace the whole roof. I would say replacing one cylinder is the same as opposed to a full overhaul.
     
  17. NealRomeoGolf

    NealRomeoGolf En-Route

    Joined:
    Apr 12, 2016
    Messages:
    3,656
    Location:
    Illinois

    Display name:
    NRG
    Sorry, I was thinking singular. I’d have to think on a top overhaul about which principle they would try to apply. It’s much easier in a business situation as opposed to hobby stuff.
     
  18. Mikey B

    Mikey B Pre-takeoff checklist

    Joined:
    Jun 17, 2021
    Messages:
    134
    Location:
    Delaware/Arizona

    Display name:
    Mike
    I can't see it, unless it's a substantial improvement, like a bigger engine or upgraded avionics. And the rules for business property are different from personal.
     
    Rcmutz and NealRomeoGolf like this.
  19. Jeff767

    Jeff767 Line Up and Wait

    Joined:
    Jan 24, 2018
    Messages:
    600

    Display name:
    Jeff767
    A overhual is a overhual. It’s part of maintenance.
     
  20. SoonerAviator

    SoonerAviator Final Approach

    Joined:
    Jul 21, 2014
    Messages:
    7,478
    Location:
    Broken Arrow, OK

    Display name:
    SoonerAviator
    From an accounting standpoint, the "materially extends the life" threshold may be easier to justify for an increase to asset basis. If you didn't do the top overhaul, the life of the engine may have been 500-1,000 hours less, which is material. I'm pretty sure you could justify that to an auditor at least in the business world.
     
    PaulMillner and Kevin Eggert like this.
  21. Todd82

    Todd82 Line Up and Wait

    Joined:
    Mar 19, 2017
    Messages:
    803
    Location:
    Southwest Ohio

    Display name:
    Todd
    So let's say 10 years ago you bought a Cherokee for $30k. Now you sell it for $70k. But you then buy a Mooney for $100k a month later.

    Do you still have to pay cap gains on the 40k you gained on the Cherokee?
     
  22. Checkout_my_Six

    Checkout_my_Six Touchdown! Greaser!

    Joined:
    Mar 4, 2007
    Messages:
    11,467
    Location:
    Maryland

    Display name:
    Check_my_Six
    would you get a credit for inflation?
     
  23. NealRomeoGolf

    NealRomeoGolf En-Route

    Joined:
    Apr 12, 2016
    Messages:
    3,656
    Location:
    Illinois

    Display name:
    NRG
    Yes
     
    Mikey B likes this.
  24. Mxfarm

    Mxfarm Line Up and Wait

    Joined:
    Aug 15, 2007
    Messages:
    517
    Location:
    KPTS, 1K4, H17

    Display name:
    Marc
    what if it was cash?;)
     
  25. Rcmutz

    Rcmutz Line Up and Wait

    Joined:
    Feb 28, 2015
    Messages:
    897
    Location:
    Columbus, OH

    Display name:
    rcmutz
    But, it adds substantial value to the airplane. A plane sold 1800 SMOH is going to cost less than one with 500 SMOH. In my mind, that OH is now part of the cost basis for the airplane I sell.
     
  26. Rcmutz

    Rcmutz Line Up and Wait

    Joined:
    Feb 28, 2015
    Messages:
    897
    Location:
    Columbus, OH

    Display name:
    rcmutz
    I am fairly confident that capital gains tax on an aircraft sale is only due if the aircraft was used as a business or was a business asset. I have not found anything that says an owner of a personal use aircraft has to pay capital gains tax on the sale of their airplane. Now, depending on the state and how the aircraft is sold, the buyer may have to pay state SALES tax.
     
  27. NealRomeoGolf

    NealRomeoGolf En-Route

    Joined:
    Apr 12, 2016
    Messages:
    3,656
    Location:
    Illinois

    Display name:
    NRG
    That would be incorrect.
     
    PaulS likes this.
  28. elvisAteMySandwich

    elvisAteMySandwich Pre-Flight

    Joined:
    Jul 23, 2020
    Messages:
    68

    Display name:
    elvisAteMySandwich
    I'm not an accountant, but I thought you are supposed to pay capital gains tax on any asset sales where you make money. That could be cars, boats, homes, cryptocurrency, antiques, collectibles, etc. The only asset that got treated special was investment real estate property where you could do a 1031 exchange and defer the capital gains tax by rolling over the investment into another like-kind investment. But everything else is a taxable event.

    Edit: Fixed the IRS section number
     
    Last edited: Apr 29, 2022
  29. NealRomeoGolf

    NealRomeoGolf En-Route

    Joined:
    Apr 12, 2016
    Messages:
    3,656
    Location:
    Illinois

    Display name:
    NRG
    You are mostly correct. I think most people forget about this type of gain because housing got a big break about 20 years ago when gains got exempted under most situations. Also, it isn't as common that you make money on personal assets that aren't investment vehicles.
     
    Snowmass likes this.
  30. flyingron

    flyingron Touchdown! Greaser! PoA Supporter

    Joined:
    Jul 31, 2007
    Messages:
    22,199
    Location:
    Catawba, NC

    Display name:
    FlyingRon
    Decades ago your personal residence was allowed to have the capital gain rolled into the next one you purchase and then there was a one-time exclusion when you turned 65. That was changed to the current scheme is that each person can exempt $250,000 ($500,000 for couples) of principal residence capital gain (subject to restrictions).

    The other thing to note is that the long term capital gains rate is determined by your overall income. If you make less than $86,000 (or so, I'm not inclined to look up the number right now), you actually don't pay any. The problem most people don't realize is that the GAIN ITSELF gets added to the rest of your income for computing the threshold, so you can easily get bumped up into the 20% bracket.
     
  31. Mikey B

    Mikey B Pre-takeoff checklist

    Joined:
    Jun 17, 2021
    Messages:
    134
    Location:
    Delaware/Arizona

    Display name:
    Mike
    The threshold to go from 15 to 20% is about $500,000. Most of us don't need to worry about getting there ...
     
  32. Rcmutz

    Rcmutz Line Up and Wait

    Joined:
    Feb 28, 2015
    Messages:
    897
    Location:
    Columbus, OH

    Display name:
    rcmutz
    Like I said, I was not able to find anything via googling the question. Most hits dealt with business aircraft and depreciation. Can you post a reference here for the rest of us?

    I found this...”Commercial aircraft are capital goods, because they are used by airlines to provide a service: transportation. An airplane used by private pilots for weekend hobbies is a consumer good. That same type of plane used for a sightseeing business is a capital good.”

    From this article written in 2022.

    https://www.thebalance.com/capital-goods-examples-effect-on-economy-3306224.
     
    Last edited: Apr 29, 2022
  33. NealRomeoGolf

    NealRomeoGolf En-Route

    Joined:
    Apr 12, 2016
    Messages:
    3,656
    Location:
    Illinois

    Display name:
    NRG
    See post #2.
     
  34. NealRomeoGolf

    NealRomeoGolf En-Route

    Joined:
    Apr 12, 2016
    Messages:
    3,656
    Location:
    Illinois

    Display name:
    NRG
    Here's another IRS link and I'll quote it.

    https://www.irs.gov/taxtopics/tc409#:~:text=You have a capital gain,, aren't tax deductible.

    "Almost everything you own and use for personal or investment purposes is a capital asset."
     
    Mxfarm likes this.
  35. NealRomeoGolf

    NealRomeoGolf En-Route

    Joined:
    Apr 12, 2016
    Messages:
    3,656
    Location:
    Illinois

    Display name:
    NRG
    I read back through publication 551 to see what defense @EdFred could have on counting a top overhaul as a cost adjustment to his basis. I think he would pass the IRS sniff test assuming the top overhaul would make the engine last more than year before major overhaul. I sure hope a top would.

    This is written more towards a business, but I would assume it applies.
    "Increase the basis of any property by all items properly added to a capital account. These include the cost of any improvements having a useful life of more than 1 year."

    Regular/routine maintenance would not count. Something big like a major overhaul or a top overhaul, in my opinion, would. It would be interesting to actually see what the IRS would say (but don't ask if you don't want the answer) since they specifically say partial replacement of a roof is not an adjustment to your basis. So is partial replacement of your engine also not an adjustment?

    If you find yourself in this situation, I would consult a professional tax CPA.
     
    Mxfarm likes this.
  36. NordicDave

    NordicDave Pattern Altitude

    Joined:
    Oct 31, 2015
    Messages:
    2,382
    Location:
    Monterey County

    Display name:
    NordicDave
    It was my understanding that any asset eligible for capital gains taxes has its basis adjusted upward for the repairs, maintenance, and improvements made to that asset. A house is a good example. New kitchen, bathrooms, reroof, the cost of an addition all changed the cost basis for the tax liability calculation.

    Normal operating expenses like insurance, oil, fuel, oxygen tank refills, annual inspections, etc are expenses that can only be deducted from income if part of a business.
     
    Last edited: Apr 29, 2022
  37. Checkout_my_Six

    Checkout_my_Six Touchdown! Greaser!

    Joined:
    Mar 4, 2007
    Messages:
    11,467
    Location:
    Maryland

    Display name:
    Check_my_Six
    Interesting.....A friend of mine bought and sold airplanes and never considered this. And no one ever asked. :rolleyes:
     
    Last edited: Apr 29, 2022
  38. PaulS

    PaulS Touchdown! Greaser!

    Joined:
    May 29, 2007
    Messages:
    12,828
    Location:
    New England

    Display name:
    PaulS
    Hmmm, probably better not to write about it on the internet.
     
  39. NealRomeoGolf

    NealRomeoGolf En-Route

    Joined:
    Apr 12, 2016
    Messages:
    3,656
    Location:
    Illinois

    Display name:
    NRG
    You said repairs, maintenance and improvements and then only listed improvements. You cannot add repairs and maintenance to your basis.
     
  40. Rcmutz

    Rcmutz Line Up and Wait

    Joined:
    Feb 28, 2015
    Messages:
    897
    Location:
    Columbus, OH

    Display name:
    rcmutz
    After reading the couple of links you provided, I would now agree that capital gain on the sale of personal aircraft property is taxable. My next question is, is there a certain amount that is exempt, like there is on a home sale?

    I also wonder how many people actually report the sale of their aircraft as a capital asset sale? Although, we really haven’t been in an aircraft value inflationary situation in a very long time. Prior to the current times, the cost of an airplane being very dependent on engine SMOH, the addition of expensive avionics, and interior upgrades, the cost basis and sale value of the aircraft were probably very close, and the sale was a wash, if not a loss. With the current inflationary value of some aircraft, that may not be the case right now.
     
    Last edited: Apr 30, 2022