An Ultimate Guide to Aircraft Leaseback and Tax Advantages for Pilots

Editorial team of TFX

• 19.01.22 • 5 min read

Leasing an airplane over to an FBO, flight school, or charter carrier can be an attractive option for first-time aircraft buyers looking to offset the substantial upfront costs of aircraft possession. On the surface, a leaseback contract appears to be a win-win situation for both parties. You can avoid being at a loss if you learn some facts about aircraft leaseback.

In addition, you can also familiarize yourself with Final Regulations published by the IRS concerning the aircraft management services so that any step you take concerning airplane leasing does not lead to loss. This post covers what an aircraft leaseback is, how it works, aircraft leaseback advantages and disadvantages, and what one should know before airplane leasing.

What is a Leaseback?

In essence, an aircraft leaseback is nothing more than a sales contract. Asset management is the responsibility of American Flight Schools, and the ownership of the aircraft rests with the individual. American Flight Schools is in charge of its marketing, introduction, training, financial transactions, and maintenance coordination.

Theoretically, an aircraft leaseback can benefit both an individual pilot and an organization that needs aircraft, for example, a flight school or a chartered operator. As part of an airplane leasing, a pilot purchases a personal plane and then rents it to a third party while maintaining ownership of the aircraft.

How Does a Leaseback Work?

A leaseback is essentially a management contract for an aircraft you possess. You are the one who provides a flight school with the plane. Flight schools are the ones that get paid. They are responsible for all of the costs. If income exceeds expenses, flight schools send you a check each month before it ends. They also send you a bill if costs surpass their revenues. You won't be dealing with any of the bothersome aspects of aircraft ownership. A flight school charges a small management fee for their services. As with all other costs, the management charge is deducted from the earnings.

Although the results may vary, plane owners typically receive monthly checks in the $1,500 range. Some airplane owners receive up to 3 times that amount every month. There are always exceptions. While some planes fly more than others, maintenance concerns can lead to lengthy downtimes and expensive maintenance costs on others. Airplane proprietors should set aside a portion of their income to help with maintenance "surprises" and more predictable costs like engine overhauls.

What are the Pros and Cons of Aircraft Leaseback?

Investing in aircraft leaseback is entirely speculative and not suitable for everyone. The decision to lease back an airplane must be carefully evaluated. Airplane leasing has both advantages and disadvantages.

Pros

Aircraft leaseback arrangements have numerous advantages. A flight school or a charter company can hire the aircraft for a fraction of the price of purchasing a new one. As a result, operators will not be left with antiquated aircraft that they should dispose of. An aircraft leaseback arrangement is beneficial to the private pilot since it lowers the upfront costs of acquiring an aircraft. Many private pilots may only afford their planes through airplane leasing. 

• Typically, your fixed costs are covered.
• You may operate the airplane for the cost of gasoline alone
• You will own the aircraft while it operates, frequently paying for the aircraft entirely within the first 4-5 years of service.
• Possibility of exceptional positive cash flow.
• Significant tax credits for accelerated depreciation

Cons

Aircraft leaseback contracts are often drafted to favor the FBO, flight school, or chartered operator that will be operating the plane. A novice private pilot may be coerced into purchasing an airplane and renting it back to the flight school without knowing how to purchase an airplane.

Even though the renter is doing the bulk of work, the owner could still be on the hook for all upkeep on the plane under specific aircraft leaseback arrangements. It is known that several flight schools and charter operators are rough with their aircraft, and therefore the aircraft leaseback scheme may not recompense owners in the case of damages to the jet.

• Maintenance "surprises" that cost thousands of dollars to fix can arise from poorly constructed airframes.
• Aircraft wear and tear is accelerated when providing Flight Training services. 

Is Aircraft Leaseback Profitable?

While each individual's situation is unique, the following are just a few reasons to consider leasing an airplane.

• You wish to own an airplane but are unable to do so outright.
• You want to benefit from the tax advantages associated with owning an airplane.
• You own an airplane, but it is not flying much. Airplanes must be flown frequently to maintain their health.
• You want to convert your aircraft into an asset, not a liability.
• You'd like to cut down on your flying expenses.
• You have training goals and would prefer to pay for training personally rather than having somebody else pay for it.
• You have a large family that wishes to learn to fly.
• You wish to work in the aviation industry.

What Should One Know Before Airplane Leasing?

It would be best to learn everything you can about buying an airplane before considering an aircraft leaseback deal. To ensure that the proposed aircraft leaseback arrangement is legitimate, you must examine the legal repercussions and comprehend how this will function on a daily basis.

Even if an aircraft is appropriate according to a flight school you got training from, it may not be in good working order or reasonably priced for the mission at hand. There will always be some ambiguity regarding the condition of an airplane until it has received a comprehensive pre-purchase inspection, ideally by an impartial technician who has no interest in the sale's success or failure. Purchasing an aircraft from somebody who wishes to sell and leasing it back to them is in their best interest.

Before signing an aircraft leaseback agreement with a flight school, or charter operator, inspect the entire fleet. Many operators ignore appearances, and rental operators seem to dislike well-appointed aircraft. They rip the chairs, destroy the carpet, litter the plane with cigarette butts, empty beer bottles, and other garbage. If the contractor's fleet looks rough and neglected, you can bet your jet will, too, if you return it to them. If you have to repaint or change the interior after your airplane leasing, it won't come cheap, and the contractor will not refund you.

Rental planes have it rough. In windy conditions, they often lack control locks. Rental pilots dislike changing the oil of a plane’s engine. Owners, not operators, will be responsible for costs such as frequent battery replacements, wind-damaged control surfaces, and early engine overhauls.

Conclusion

Airplane leasing seems to be beneficial. It is indeed beneficial if you buy an aircraft from a good flight school and then lease it to a reputed flight school that will bring benefit to you rather than damaging your aircraft. Failing to learn everything necessary about airplane leasing will make your aircraft a liability rather than an asset.