Aircraft tax question

George Patterson wrote:

BTIZ wrote:

ok... I'm not a tax expert... but when you sell a car.. what taxes
apply to the seller..


According to the IRS, the selling price of the car is taxed as income. I
would prefer that that is not the case with aircraft.

Well, it has been a while since I read the tax code, but I believe this
is true only if you sell the car for more than you paid for it. This is
very unlikely with most cars...


Matt

"TaxSrv" wrote in message
...
"Mike Rapoport" wrote:
Figuring out your cost basis after years of ownership
would be very difficult if not impossible.

Not necessarily at all. Basis is simply original cost, plus only
capital expenditures. Latter typically is engine and/or prop,
major overhaul or new. Add amounts spent for avionics plus
additional panel instrumentation, not mere replacements. Subtract
avionics ripped out and sold, removing the sales price, like on
eBay. Paint is never a capital item, but an interior would be if a
significant improvement, like leather replacing cloth or ugly
factory design.

An abnormal case, but mine was $12K new in 1977; so say sold now
for $30K. Avionics items about $5K years ago on a mental tally.
Interior job don't count; it was essentially repair replacement.
So I have a guess $13K taxable gain, at a low capital gain rate. I
need then to dig out the actual avionics invoices, which I should
have in a fat file folder, or list from memory where need be. A
good-faith estimate for basis items can go on a 1040; if audited,
discuss then without much fuss.

If a loss on a personal use aircraft, nothing is reported to IRS,
as it is net gain, not sales price which is reported on 1040 Sch D.

Fred F.


I see the following problems/ambiguities with your method:

I would definately add paint to the basis, particularly if it was done
recently. It definately adds value to the airplane.

How much of the upgraded avionics value was "consumed" during your
ownership? Normally one would depreciate the avionics and have a basis for
them, but is is fair to add the entire avionics cost to the airplane's basis
if the avionics were added 15yrs and 2000hrs ago?

If, the day before I sell the airplane, I replace the autopilot servos that
were 15yrs old when I bought the airplane and 20yrs old now, does that add
to the basis?

If, when the airplane was purchased, all the bushings in the landing gear
pivots were worn out and replaced at the buyers expense, shouldn't that be
factored into the basis? If the seller had replace the bushings and
increased the price by the cost to do so, the basis would be higher.

If you purchased the airplane with a crappy interior and it is like new now
then clearly you should add some of that cost to the basis but how much?

If you bought the airplane with a run out engine and overhauled the engine
for $10K and TBO is 2000hrs and you have put 1000hrs on the engine, what
should you do to the airplanes basis? If you just pro-rate you get $5K
What if you had to do a top overhaul for $5K at 900hrs?

All these things are easy if the airplane was used for business and all
expenses were either expensed or capitalized and depreciated leading to an
unambigous basis. A used airplane is actually a collection of used parts in
variour stages of wearing out. After owning an airplane for multiple years
it is impossible to calculate what the true basis should be unless you know
what the life limits of each part are. The airplanes I have sold were, in
most ways, newer than when I bought them

I think that there is so much ambiguity here that reasonable arguments could
be made that there is no gain on sale in the vast majority of cases. In the
case of the airplane that would sell for more than new, clearly there is a
gain if it was purchased new and the total of any improvements was less than
the increase in value.

Mike
MU-2

"Mike Rapoport" wrote:

I would definately add paint to the basis, particularly if it
was done recently. It definately adds value to the airplane.

The IRS has long ago ruled that paint on anything is not capital.
If a very fresh paint, one might argue on the concept of "fixing-up
expenses," if done after the intent to promptly sell was formed.

How much of the upgraded avionics value was "consumed" during
your
ownership? Normally one would depreciate the avionics and have a
basis for
them, but is is fair to add the entire avionics cost to the
airplane's basis
if the avionics were added 15yrs and 2000hrs ago?

Under long held principles of tax law -- yes. Add avionics from day
one to basis, even if a box is ripped out and sold on eBay for $1.
Even if gone thru 3 comms, trading in the old one each time.

If, the day before I sell the airplane, I replace the autopilot
servos that
were 15yrs old when I bought the airplane and 20yrs old now, does
that add
to the basis?

Depends if a repair was called for. Doesn't matter when done;
repairs do not add to basis. Else, a possible fixing up expense if
for purpose of sale. Don't know why somebody would replace working
servos just to better sell it, unless owner is an A&P maybe.

If, when the airplane was purchased, all the bushings in the
landing gear
pivots were worn out and replaced at the buyers expense,
shouldn't that
be factored into the basis?

No, it's a repair.

If you bought the airplane with a run out engine and overhauled
the engine
for $10K and TBO is 2000hrs and you have put 1000hrs on the
engine, what
should you do to the airplanes basis? If you just pro-rate you
get $5K

We don't prorate nuthin'. Even if you put 6,000 hours on the
plane, and did three majors at 2,000 hrs each, under tax law your
basis reflects a 4-engine airplane with one prop.

What if you had to do a top overhaul for $5K at 900hrs?

Sounds like a repair to me at only 900 on 2,000 TBO. No effect on
basis.

All these things are easy if the airplane was used for business
and all expenses were either expensed or capitalized and
depreciated leading to an unambigous basis.

No, the rules on what is capital vs. repair do not change, personal
or business asset. Tax law merely says no depreciation allowed for
personal use portion, including100% personal.

I think that there is so much ambiguity here.

No, it's very simple for a personal asset, because we don't worry
about the complexities of computing depreciation. For a personal
asset, you may capitalize basically big items not in the nature of
usual repairs. Except paint, which is a repair too.

Fred F.

BTIZ wrote:
ok... I'm not a tax expert... but when you sell a car.. what taxes apply to
the seller..
is it a capital gains or loss.. if you intend to take a capital gain/loss be
sure to factor in depreciation

I can't ever imagine it being a gain, unless it's an antique bird that has
really appreciated in value..


You only have to worry about depreciation that was deducted (if you used
it for business). Otherwise your gain is the sales price (less any
expenses involved in the sale) less the purchase price less any capital
improvements you made to the aircraft.

If you've held the aircraft for more than a year you owe 15% of the
gain.

George Patterson wrote:
BTIZ wrote:
ok... I'm not a tax expert... but when you sell a car.. what taxes
apply to the seller..

According to the IRS, the selling price of the car is taxed as income. I
would prefer that that is not the case with aircraft.

It's not the case with either the car or the aircraft which the IRS
treats the same. The taxable gain is the difference between the
sales price and the basis (essentially what you paid for it). Car's
rarely appreciate.

TaxSrv wrote:

Not necessarily at all. Basis is simply original cost, plus only
capital expenditures. Latter typically is engine and/or prop,
major overhaul or new. Add amounts spent for avionics plus
additional panel instrumentation, not mere replacements. Subtract
avionics ripped out and sold, removing the sales price, like on
eBay. Paint is never a capital item, but an interior would be if a
significant improvement, like leather replacing cloth or ugly
factory design.
If a loss on a personal use aircraft, nothing is reported to IRS,
as it is net gain, not sales price which is reported on 1040 Sch D.

Thanks. I had hoped that would be the case.

George Patterson
Drink is the curse of the land. It makes you quarrel with your neighbor.
It makes you shoot at your landlord. And it makes you miss him.

Mike Rapoport wrote:

"TaxSrv" wrote in message
...

"Mike Rapoport" wrote:

Figuring out your cost basis after years of ownership
would be very difficult if not impossible.

Not necessarily at all. Basis is simply original cost, plus only
capital expenditures. Latter typically is engine and/or prop,
major overhaul or new. Add amounts spent for avionics plus
additional panel instrumentation, not mere replacements. Subtract
avionics ripped out and sold, removing the sales price, like on
eBay. Paint is never a capital item, but an interior would be if a
significant improvement, like leather replacing cloth or ugly
factory design.

An abnormal case, but mine was $12K new in 1977; so say sold now
for $30K. Avionics items about $5K years ago on a mental tally.
Interior job don't count; it was essentially repair replacement.
So I have a guess $13K taxable gain, at a low capital gain rate. I
need then to dig out the actual avionics invoices, which I should
have in a fat file folder, or list from memory where need be. A
good-faith estimate for basis items can go on a 1040; if audited,
discuss then without much fuss.

If a loss on a personal use aircraft, nothing is reported to IRS,
as it is net gain, not sales price which is reported on 1040 Sch D.

Fred F.



I see the following problems/ambiguities with your method:

I would definately add paint to the basis, particularly if it was done
recently. It definately adds value to the airplane.

I'm not a tax expert, but from what I understand, paint would definitely
be considered maintenance rather than a capital improvement. I believe
the basic rule is pretty simple: are you bringing the asset back to a
state in which it formerly existed or are you taking it to a "better"
state? If the airplane came from the factory with good paint, then
painting it is simply restoring it to its previous condition and thus is
a repair and not an improvement. Now a high-end custom mural airbrush
paint job could probably legimately be argued to be a capital
improvement. :-)


How much of the upgraded avionics value was "consumed" during your
ownership? Normally one would depreciate the avionics and have a basis for
them, but is is fair to add the entire avionics cost to the airplane's basis
if the avionics were added 15yrs and 2000hrs ago?

But depreciation assumes business use for the asset, right?


If, the day before I sell the airplane, I replace the autopilot servos that
were 15yrs old when I bought the airplane and 20yrs old now, does that add
to the basis?

I suspect that would be a hrad sell unless the servos add some
substantial new features. If they simply replicate the
performance/features of the original servos, then I could see the IRS
determining this to be a repair.


If, when the airplane was purchased, all the bushings in the landing gear
pivots were worn out and replaced at the buyers expense, shouldn't that be
factored into the basis? If the seller had replace the bushings and
increased the price by the cost to do so, the basis would be higher.

Again, I'd say this is a repair. It is like putting new siding on your
house or replacing your shingles or your water heater.


If you purchased the airplane with a crappy interior and it is like new now
then clearly you should add some of that cost to the basis but how much?

Only what went beyond the original. If it came with cloth seats and you
replace with leather, then I think you could argue a basis increase. If
you simply replace with new cloth, then I think the basis remains the same.


If you bought the airplane with a run out engine and overhauled the engine
for $10K and TBO is 2000hrs and you have put 1000hrs on the engine, what
should you do to the airplanes basis? If you just pro-rate you get $5K
What if you had to do a top overhaul for $5K at 900hrs?

Good question. Again, seems like a repair under the standard IRS rules,
but given the extreme cost of repairs on an airplane, maybe there is a
different treatment allowed for things like overhauls.


All these things are easy if the airplane was used for business and all
expenses were either expensed or capitalized and depreciated leading to an
unambigous basis. A used airplane is actually a collection of used parts in
variour stages of wearing out. After owning an airplane for multiple years
it is impossible to calculate what the true basis should be unless you know
what the life limits of each part are. The airplanes I have sold were, in
most ways, newer than when I bought them

I think that there is so much ambiguity here that reasonable arguments could
be made that there is no gain on sale in the vast majority of cases. In the
case of the airplane that would sell for more than new, clearly there is a
gain if it was purchased new and the total of any improvements was less than
the increase in value.

Yes, I guess it probably comes down to who your auditor is and how
persuasive you or your lawyer are. :-)

I've never yet had the pleasure of an IRS audit, so I have no idea how
the typical auditor is with respect to logical arguments.


Matt

Mike Rapoport wrote:

Paint generally counts only when done IMMEDIATELY before the sale.


How much of the upgraded avionics value was "consumed" during your
ownership? Normally one would depreciate the avionics and have a basis for
them, but is is fair to add the entire avionics cost to the airplane's basis
if the avionics were added 15yrs and 2000hrs ago?

You don't depreciate stuff in personal ownership. You can add the
capitol improvement of purchasing / installing avionics to the plane
(as opposed to maintaining what was there). You need to subtract
from the basis any residual value from anything your removed (if you
for example sell off your old stuff after it is removed).

If, the day before I sell the airplane, I replace the autopilot servos that
were 15yrs old when I bought the airplane and 20yrs old now, does that add
to the basis?

Probably those would be considered maintenance

If, when the airplane was purchased, all the bushings in the landing gear
pivots were worn out and replaced at the buyers expense, shouldn't that be
factored into the basis? I

Nope, correcting wear and tear is NOT generally counted. However,
certain fixes you have to right before the sale to make things
sellable can be added to your basis.


If you purchased the airplane with a crappy interior and it is like new now
then clearly you should add some of that cost to the basis but how much?

The "value of things" doesn't MATTER. The issue is WHAT YOU PAID FOR
and whether that is a capital (or other allowable) expense. You
subtract that from WHAT YOU SELL the plane for. The difference is your
capital gain.


If you bought the airplane with a run out engine and overhauled the engine
for $10K and TBO is 2000hrs and you have put 1000hrs on the engine, what
should you do to the airplanes basis? If you just pro-rate you get $5K
What if you had to do a top overhaul for $5K at 900hrs?

The basis is what you paid. How much time is on the engine is
IMMATERIAL. The change in value of the engine is taken care of in
your purchase /selling price.

Just don't make the mistake of selling the aircraft to a related party (son,
father, cousin, etc.). In that case the gain is "ordinary" and subject to
whatever your marginal rate is.

"Ron Natalie" wrote:

If you've held the aircraft for more than a year you owe 15% of the
gain.

OK. I did not realize that *everything* gets added to the basis (even if it
was thrown away year ago and you arn't even selling it when you sell the
airplane.) I guess it makes some sense since the business user would have
deducted these costs over time.

Mike
MU-2


"TaxSrv" wrote in message
...
"Mike Rapoport" wrote:

I would definately add paint to the basis, particularly if it
was done recently. It definately adds value to the airplane.

The IRS has long ago ruled that paint on anything is not capital.
If a very fresh paint, one might argue on the concept of "fixing-up
expenses," if done after the intent to promptly sell was formed.

How much of the upgraded avionics value was "consumed" during
your
ownership? Normally one would depreciate the avionics and have a
basis for
them, but is is fair to add the entire avionics cost to the
airplane's basis
if the avionics were added 15yrs and 2000hrs ago?

Under long held principles of tax law -- yes. Add avionics from day
one to basis, even if a box is ripped out and sold on eBay for $1.
Even if gone thru 3 comms, trading in the old one each time.

If, the day before I sell the airplane, I replace the autopilot
servos that
were 15yrs old when I bought the airplane and 20yrs old now, does
that add
to the basis?

Depends if a repair was called for. Doesn't matter when done;
repairs do not add to basis. Else, a possible fixing up expense if
for purpose of sale. Don't know why somebody would replace working
servos just to better sell it, unless owner is an A&P maybe.

If, when the airplane was purchased, all the bushings in the
landing gear
pivots were worn out and replaced at the buyers expense,
shouldn't that
be factored into the basis?

No, it's a repair.

If you bought the airplane with a run out engine and overhauled
the engine
for $10K and TBO is 2000hrs and you have put 1000hrs on the
engine, what
should you do to the airplanes basis? If you just pro-rate you
get $5K

We don't prorate nuthin'. Even if you put 6,000 hours on the
plane, and did three majors at 2,000 hrs each, under tax law your
basis reflects a 4-engine airplane with one prop.

What if you had to do a top overhaul for $5K at 900hrs?

Sounds like a repair to me at only 900 on 2,000 TBO. No effect on
basis.

All these things are easy if the airplane was used for business
and all expenses were either expensed or capitalized and
depreciated leading to an unambigous basis.

No, the rules on what is capital vs. repair do not change, personal
or business asset. Tax law merely says no depreciation allowed for
personal use portion, including100% personal.

I think that there is so much ambiguity here.

No, it's very simple for a personal asset, because we don't worry
about the complexities of computing depreciation. For a personal
asset, you may capitalize basically big items not in the nature of
usual repairs. Except paint, which is a repair too.

Fred F.