Selling an Aircraft: The Tax Bill Nobody Quotes You

Owners plan for 20%. The actual answer, for a plane that has been depreciated, is usually ordinary income at rates up to 37% — plus state tax, and possibly a second layer of corporate tax on top of that. On a $4 million sale the gap between what people expect and what they owe is routinely seven figures.

Why an aircraft is not taxed like real estate

An aircraft is Section 1245 property. That is the whole story in one line.

When you sell real estate, the depreciation you took comes back as unrecaptured Section 1250 gain, capped at 25%. When you sell an aircraft, the depreciation comes back as Section 1245 recapture taxed as ordinary income — no cap, no preferential rate, up to 37% federal.

Only the portion of the sale price above your original cost gets capital gain treatment. Everything between your depreciated basis and your original cost is ordinary income.

For most aircraft this is almost the entire gain, because planes rarely sell above original cost. Which means the "capital gains tax on my plane" question usually has an uncomfortable answer: there isn't much capital gain, there's mostly recapture.

Bonus depreciation is why the recapture is so large

Aircraft have been one of the most aggressively depreciated asset classes in the code. Owners who claimed large first-year write-offs — often most of the purchase price — drove basis down to near zero very quickly.

Every one of those dollars is waiting to be recaptured on sale.

The bonus depreciation percentage has changed repeatedly across recent tax acts, and what you were entitled to depends on when the aircraft was placed in service. That history is exactly why the recapture number surprises people: the deduction happened years ago, in a different tax year, under a different rule, and nobody carried the liability forward in their head. Pull the depreciation schedule before you list the aircraft, not after you have a buyer.

The 50% business-use test that reaches backwards

Aircraft are listed property under Section 280F. Business use must exceed 50% each year.

Drop below 50% in any year and two things happen: you lose accelerated depreciation going forward and must switch to the slower ADS straight-line method, and you must recapture the excess depreciation already claimed in prior years — as ordinary income, in the year business use fell.

This bites people whose flying patterns changed. The company scaled back, the owner started using the plane more personally, and a deduction taken four years ago reverses into income today. Flight logs are the evidence, and they are the first thing examined.

Entity structure changes the answer more than anything else

This is where aircraft differ most from other assets, and where the largest avoidable mistakes live.

Owned personally or through an LLC or S corporation (passthrough). One layer of tax. Recapture is ordinary income on your return, capital gain above original cost is capital gain, and the 3.8% net investment income tax may apply depending on whether you materially participate.

Owned by a C corporation. Two layers, and this is the expensive one. The corporation pays 21% federal corporate tax on the entire gain, including recapture. Then, to get the money out to you personally, the distribution is a dividend taxed at up to 23.8% including the surtax. Stack those and the combined federal burden approaches 40% on the same dollars — and unlike an individual, a C corporation gets no preferential rate on capital gains at all. Corporate capital gains are taxed at ordinary corporate rates.

Owners often placed the aircraft in a C corp for liability or regulatory reasons years ago, without modelling the exit. By the time the plane is sold, the structure is very hard to unwind cleanly — liquidating the corporation is itself a taxable event.

A single-purpose "flight department company" carries its own FAA problems that sit outside tax entirely. If a separate entity owns the aircraft and provides flights to related parties for compensation, the FAA may treat it as illegal commercial operation under Part 135. Aviation counsel, not just a CPA.

What it actually costs: a worked example

A business aircraft bought for $6,000,000 in 2018, depreciated down to a basis of $1,200,000, sells today for $4,500,000.

There is no capital gain here at all. The plane sold below its original $6M cost, so every dollar of the $3.3M gain over basis is recapture at ordinary rates.

Now run the identical sale inside a C corporation:

Same aircraft, same price, roughly $92,000 more — and that is before state tax at either level. In California, with corporate tax at 8.84% and personal rates on the dividend, the spread widens considerably.

What actually reduces it

A 1031 exchange will not work. Like-kind exchange treatment was limited to real property from 2018 onward. Trading up to a larger aircraft used to defer the entire gain. That door is closed, and it is the single biggest change in aircraft tax planning in a generation.

An installment sale defers the capital gain but not the recapture. Under §453(i), recapture income is recognised in full in the year of sale regardless of payment terms. For an aircraft — where the gain is mostly recapture — this limits how much an installment structure can do. It is honest to say that plainly rather than sell a structure that does not fit the asset.

Allocation in the purchase agreement matters. Aircraft sales frequently include engine programs, avionics upgrades, spare parts inventory and maintenance credits. How the contract allocates value across those components changes the recapture computation, and it is negotiable while the deal is being papered.

Timing against a low-income year helps, because the recapture is ordinary income sitting in your ordinary brackets.

Entity planning before the sale, not during it. This is the one with the most leverage and the shortest window.

Frequently asked

Q: Is selling an aircraft a capital gain? A: Usually only in part, and often not at all. An aircraft is Section 1245 property, so depreciation you claimed is recaptured as ordinary income at rates up to 37%. Only proceeds above your original purchase price receive capital gain treatment, and most aircraft sell for less than they cost.

Q: What is the tax rate on selling a business jet? A: For a depreciated aircraft held in a passthrough, expect ordinary rates up to 37% on the recapture portion plus state tax. Held in a C corporation, expect 21% corporate tax plus up to 23.8% again on the dividend when you extract the proceeds.

Q: Can I 1031 exchange an aircraft into another aircraft? A: No. The 2017 Act restricted Section 1031 to real property beginning in 2018. Aircraft-for-aircraft exchanges no longer defer the gain.

Q: Does an installment sale help on an aircraft? A: Less than on most assets. Section 453(i) requires depreciation recapture to be recognised in the year of sale even when payments are spread, and recapture is usually the bulk of an aircraft gain. It can still help with the portion that is genuine capital gain and with state thresholds, but it is not the whole answer.

Q: What happens if business use drops below 50%? A: You lose accelerated depreciation prospectively, must switch to ADS straight-line, and must recapture excess depreciation already claimed as ordinary income in the year the test fails. Flight logs are the evidence.