Sarah Nilsson, JD, PhD, MAS
Sarah Nilsson, JD, PhD, MAS

Buy & Sell Aircraft

Aircraft Ownership by Raymond C. Special[...]
Adobe Acrobat document [3.5 MB]

Aircraft Purchasing - starts out with finding the aircraft that's best for you - deciding what to buy - often hard to differentiate between what you want and what you need -  look to mission, as in what you will need 80-85% of the time - consider:

* where you will fly

* how often you will fly

* will you carry passengers

* VFR or IFR

* cost to fly and maintain

* aircraft range

- the purchase process

  * inspections

  *paperwork

  * title services

- insurance

- finalizing the deal 

 

Sharing the cost -

* co-ownership  

* flying clubs (more than cost savings, encouragement and information, family activities, AOPA flying club resources)

 

Where to look -

* Airport Bulletin Boards

* Popular Websites

Trade-a-Plane

Aircraft Shopper Online

Barnstormers

Controller

* Type Club websites (classifieds)

American Bonanza Society

Cessna Pilots Association

Cardinal Flyers Online

 

RED FLAGS - beware of 

* aircraft that do not meet your defined mission

* logbooks and ownership records that do not agree

* unmanaged corrosion

* aircraft beyond your financial or piloting means 

 

Vref (aircraft value reference)

* for piston equipment

* sales/use tax info

* comprehensive information on most aircraft

* each aircraft is different

* view online or call AOPA - 800-USA-AOPA - 800-872-2672 

 

Financing

* interest rate depends on amount of loan and type of aircraft

* larger loans get lower rates

* AOPA Aviation Finance - monthly payment calculator - 15-20 year amortization rate - 15% down - 4.75% rate over $100K

6.5% rate under $100K

(roughly equates to $250 a month)

* continuing ownership costs - aircraft operating costs calculator

1. monthly loan payment

2. Maintenance (contact local mechanic) - guide to aircraft inspections

3. Hangar

4. Inspections

5. Fuel/hour

6. Oil change (50-hour interval)

7. additional oil

8. overhaul reserve

9. Maintenance reserves

10. Annual inspection

11. Insurance

12. Database updates

13. Tie-down rental

(Note: ask to see seller's last 2 years for annual inspections breakdowns)

Pre-purchase inspection typically lasts 3-4 hours at $100 an hour

ADS-B units - $2,000 - $5,000 plus installation at 10-15 hours for $100 an hour

 

Before you buy

* talk with experienced owners

* have a mechanic do a pre-purchase inspection and flight

* ideally, the mechanic should have experience with that type of aircraft

* thorough logbook review

 

Pre-purchase inspection

* not necessarily an annual - can vary widely in scope and cost - make it clear what you want done

* review of logbooks and other records including - FAA Form 337 - AD list

* written report of aircraft and logbook review

* decide how to handle discoveries

* schedule a final inspection prior to delivery

 

Legal issues

* get your agreement in writing before pre-purchase inspection (sale of goods $5000 or more)

* use an aviation attorney in state of delivery/aircraft will reside

* AOPA PPS legal services plan includes a 1-hour consultation, which can be used for your purchase agreement - $49/year (PPS plus includes 2 hours for $99)

* include in the sales contract:

1. Identification of parties

2. Aircraft description

3. Price

4. Deposits (refundable or not)

5. Closing (use title and escrow services - have parties split cost

6. Contingencies

7. Delivery of aircraft

8. Transfer of title/risk of loss

9. Taxes

10. Title warranties

11. Pre-Purchase Inspection

12. Aircraft condition (as is - with all faults)

13. Agreement modifications

14. Dispute resolution and governing law

 

Pitfalls to avoid

* names must exactly agree on bill of sale and registration

* Aircraft registration - Form 8050-1 - must be original - no copies

* PO Box must include a physical location

* possible title liens

* risk of fraud without escrow service

 

Aircraft Title and Escrow Services - Aero Space Reports 

* title search package includes title search - complete aircraft records - accident/incident history

* $95/AOPA members - 2-day turn-around

* title clearing, if necessary

* title insurance

* closing - escrow instructions - document filings

* aircraft title and escrow services

 

Insurance

* limits of liability and hull

liability: highest you can reasonably afford

hull: replacement value of aircraft

* named and approved pilots (unless open pilot clause)

* be aware of terms particular to your operation (e.g. business and pleasure, industrial aid, etc.)

* know sublimits or per passenger or smooth

 

AOPA Insurance Services

* for over 20 years have insured more GA aircraft - including light sport, turbine, and experimental planes -  than anyone else in the world

* have access to all major carriers with "A" ratings and will provide you with coverage options to fit your needs

 

Bill of Sale

FAA Form 8050-2

complete blue areas

seller must sign in ink

FAA does not care about amount

 

Sales and Use Tax

* laws vary by state - aircraft is taxed in the state where it is based - take delivery - NOT PURCHASED - look for flyaway exemption 10-15 days)

* personal property tax in some states - can vary by county and city as well

* State use tax could be as high as 8-9%

Note: states regularly check FAA registry and FBO-based aircraft list

Arizona DOT - aircraft services

AOPA Pilot's Guide to Taxes

 

Federal Income Tax

* business use - profit motive - ordinary, necessary, and reasonable - actual deductions are for % of hours that are business

 

Final Inspection

* visually inspect the aircraft before signing

* no damage since the pre-purchase inspection

* all contract conditions fulfilled

* transfer necessary documents

 

FAA paperwork to send - aircraft certification

* 8050-1 - Registration application - takes 3-6 weeks - temporary registration good for 90 days

* 8050-2 - Bill of Sale

* 8050 -3 - Existing registration from aircraft (previous owner signs the back of the form)

* $5 recording fee - check made out to FAA

Note: airworthiness certificate stays in aircraft

For LLCs or Corps: Have statement of support of the Registration of US civil aircraft in name of LLC

 

 

Most litigation over aircraft purchases arises because:

1. Buyer and Seller did not come to a clear agreement on all aspects of the transaction and failed to properly document the deal, especially aircraft condition

2. Buyer failed to commission an adequate pre-purchase inspection and title search before buying the aircraft, and/or

3. transaction was not properly documented and recorded with the FAA Aircraft Registry and the new International Registry

 

State law largely governs the buying and selling of aircraft, with federal law only peripherally involved

Fortunately, the law of all 50 states is now virtually identical with the adoption of the Uniform Commercial Code (UCC)

Where a federal statute provides a system for recording documents of ownership and security interests in a specific class of products, federal law prevails

e.g. with aircraft under the Federal Aviation Act of 1958, as amended

 

Sale of an aircraft raises legal considerations not only for the buyer and seller but also for any lender who may be financing the purchase for the buyer and any person/business that may already hold a security interest in the aircraft

 

Buyer: state law - law of warranty covered by UCC - as to product and law of security interests as to title

 

Security Interest: legal interest in an item of personal property that secures the payment of a debt - person/business may acquire a security interest in an aircraft by loaning money to the purchaser and obtaining a written security agreement signed by the purchaser, by performing work or furnishing goods/services to the aircraft (mechanics' and materialmen's liens or artisans' liens) or by providing storage for the aircraft (warehousemen's liens)

If the aircraft owner does not pay the debt when due, the holder of a security interest has the right to take possession of the aircraft (or to retain possession e.g. repair station) even without resorting to judicial process, so long as no breach of peace

FAA aircraft security agreement formac80[...]
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Perfection and Priority

Except for aircraft and engines covered by the Cape Town Treaty, filing the security agreement with the FAA Aircraft Registry perfects a non-possessory security interest in an aircraft

If a lienholder who is not in possession of the aircraft fails to record a security agreement with the FAA Aircraft Registry, a buyer who is not otherwise aware of that security interest (aka a good faith purchaser without notice) takes clear title, and the lienholder's security interest is unenforceable

In the event of several security interests in an aircraft having a total value that may exceed the value of the aircraft - if the aircraft owner is unable or unwilling to pay these debts, the question of priority among the holders of these security interests becomes important

Any unpaid lienholder may repossess the aircraft and dispose of it per the UCC - in any commercially reasonable manner, with notice of sale to the aircraft's registered owner required before the sale can take place

If proceeds of sale are greater than total of all possessory and recorded security interests, all lienholders receive entire amounts owed and surplus goes to pre-repossession aircraft owner

If proceeds of sale are less than total of all possessory and recorded security interests, order of priority set forth below applies:

- person having possession of aircraft under possessory lien for parts, labor, materials, or services has first priority - entitled to be paid in full (possession 9/10s of law!)
- between holders of recorded security interests (filed with FAA Aircraft Registry) priority runs from date and time of filing (first in time, first in right) - first entitled to be paid in full, then next in line etc.

 

Release of Liens

If for some reason an FBO, mechanic, or repair station releases an aircraft after being worked on but before the bill is paid, then it may have the aircraft owner sign a promissory note for the amount due, secured by a security agreement, giving the creditor a security interest in the aircraft  -  these documents should be filed with the FAA Aircraft Registry

If aircraft is released without these, lien is extinguished

If this procedure is followed, lien is preserved (at lower priority behind other previously recorded security interests)

If a lien does exist the buyer should ensure lienholders are paid out of proceeds of sale and provide buyer a lien release which can then be filed with FAA Aircraft Registry to clear that security interest off aircraft's records

Cape Town Treaty

Added additional filing requirements for security interests and leases in certain aircraft and components

Physically located in Dublin - Ireland

Operates entirely via secured transactions online - 24/7/365

Facilitates financing

Reduces financing costs for international aircraft transactions

Creates international legal process for repossession that enables a secured lender, following a default, to deregister the aircraft and obtain its export from a country that has ratified the treaty, to take possession or control of the aircraft or sell or grant a lease of the aircraft, and to collect and receive income or profits from the management or use of the aircraft

Requirements are not retroactive - apply only to transactions on or after the treaty's effective date

Interests that can be registered under the treaty:

* security agreements

* conditional sales contracts

* lessor's interest under a lease

* assignments

* bills of sale

* subordination agreements

* subrogation agreements

* amendments

* discharges (terminations and releases)

* extensions of any of the above

* prospective interests - eg transaction to accomplish any such listed interest that has not yet closed

As adopted in the United States by The Cape Town Treaty Implementation Act of 2004 - August 9, 2004 which:

  • Recognizes the International Registry as an additional place for the filing of interests, including prospective interests, in certain airframes, helicopters, and aircraft engines.
  • Establishes the right for owners of these aircraft to grant an Irrevocable De-Registration and Export Request Authorization (IDERA) to a secured party.
  • Reduces from 750 to 550 rated take-off shaft horsepower the size threshold for aircraft engines eligible to be recorded as collateral in security instruments.
  • Establishes the Civil Aviation Registry as the Authorizing Entry Point.

The effective date of these changes is March 1, 2006.

Aircraft and Aircraft Engines Eligible for International Registry Recording:

  • Airframes that are type certificated to transport:
    • At least eight (8) persons including crew; or
    • Goods in excess of 2750 kilograms (6050 pounds)
  • Helicopters that are type certificated to transport:
    • At least five (5) persons including crew; or
    • Goods in excess of 450 kilograms (990 pounds)
  • Jet propulsion aircraft engines with at least 1750 pounds of thrust or its equivalent.
  • Turbine-powered or Piston-powered aircraft engines with at least 550 rated take-off horsepower or its equivalent.

Perfection

 - by filing - 2 steps 

1. file with FAA Aircraft Registry

2. file with International Registry (must file with FAA first to be accepted)

 

Priority

Whoever files first has priority over all others

e.g. a lender that files its security agreement with the FAA but fails to also register it with the International Registry  risks losing its priority to a subsequent creditor that registered its interest with the International Registry even if the subsequent creditor was aware of the prior lien

Prospective interest is effective from the date of filing assuming the transaction is later completed

 

Searching the International Registry

search both FAA and international registries

for International Registry - person must first obtain a priority search certificate from registry for particular aircraft or engine that is subject of inquiry

title search companies routinely perform searches of both for their clients

 

Warranty: Statement or representation made by seller regarding year of manufacture, make and model, equipment, condition, and title - state law under UCC governs - 2 categories:

1. Express Warranties - not required to be in writing - may be created verbally - need not be in any particular form - highly suggested that you do in fact put them in writing to avoid litigation later

UCC 2-313:

(1) Express warranties by the seller are created as follows:

  • (a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.
  • (b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.
  • (c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

(2) It is not necessary to the creation of an express warranty that the seller use formal words such as "warrant" or "guarantee" or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty.

Affirmation of fact: statement of fact or promise made as part of a bargain

Mere commercial puffery: exaggerated or extravagant statement made for the purpose of attracting buyers to a particular product/service - commonly used with advertising and promotional sales testimonials - does not create a warranty - some stuff is allowed e.g."it's a fantastic little airplane; you won't find a better one anywhere!"

2. Implied Warranties (2 kinds)

- Implied warranty of merchantability

To be airworthy, an aircraft must be in its original or properly altered (in accordance with FARs) condition, as verified by the logbooks and maintenance records - the fact that the aircraft will fly is NOT proof enough!

UCC 2-314

(1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.

(2) Goods to be merchantable must be at least such as

  • (a) pass without objection in the trade under the contract description; and
  • (b) in the case of fungible goods, are of fair average quality within the description; and
  • (c) are fit for the ordinary purposes for which such goods are used; and
  • (d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and
  • (e) are adequately contained, packaged, and labeled as the agreement may require; and
  • (f) conform to the promise or affirmations of fact made on the container or label if any.

(3) Unless excluded or modified (Section 2-316) other implied warranties may arise from course of dealing or usage of trade.

- Implied warranty of fitness for a particular purpose

UCC 2-315

Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

Disclaimer of Warranties

UCC does permit sellers to disclaim some warranties

Written express warranties CANNOT be disclaimed

Oral express warranties and implied warranties MAY be disclaimed - must be in writing and conspicuous

Implied warranties CAN be disclaimed by use of:

- "there are no warranties which extend beyond the description of the aircraft on the face of this agreement, including, but not limited to, any implied warranty of merchantability" or

- "the aircraft is delivered and accepted as is, with all faults" or

- other language that in common understanding calls the buyer's attention to the exclusion of warranties and makes it plain that there is no implied warranty

 

When the buyer before purchasing the aircraft has examined it thoroughly (or had the opportunity to examine it but refused to) there is no implied warranty covering defects that such an examination ought to have revealed

 

Breach of warranty claims

If warranty is breached, buyer must notify seller and give him an opportunity to correct ("cure") the problem

If seller fails or refuses to fix the problem, buyer may sue for breach of warranty seeking:

- specific performance (court order for seller to correct the deficiency at its expense) or

- damages (judgment ordering seller to reimburse buyer cost of repairs) or

- rescission (judgment ordering seller to refund purchase price and take back aircraft)

How to Avoid Litigation

Contract of sale: in the interest of both buyer and seller to have a written purchase contract clearly expressing the warranties agreed to or excluded from the deal, written by a lawyer or negotiated between parties both represented by lawyers

Conditional sale contract: unique form of secured transaction typically providing that title to the aircraft does not pass to buyer until the debt is paid in full - if buyer misses a payment or is late in submitting a payment, seller still holding title can legally repossess the aircraft and buyer gets nothing back

 

Prepurchase Inspection

hire an aircraft mechanic to perform a prepurchase inspection - someone you know and trust or who has an excellent reputation - A&P with IA having special experience and familiarity with  particular make and model - with access to ADs and SBs

nothing less than an annual inspection (C check for turbine-powered aircraft)

 

Title Search

Performing title searches at both the FAA Aircraft Registry and the International Registry should reveal not only who owns an aircraft but also all recorded security interests outstanding against the aircraft

AOPA Aircraft Title and Escrow Services will also perform a title search for a modest fee - typically backed up with title insurance protecting you against any error in their report

If you are borrowing to purchase the aircraft, the lender will require that you purchase a title search as a precondition of making the loan

The International Registry requires that the party performing the search first register (may take several days) and pay a fee for access

One type of security interest that a title search may not reveal is the possessory lien

 

Aircraft title insurance 

Most appropriate for corporate aircraft

 

Closing the sale

Good practice is to have a formal closing - where buyer, seller, lending institution, and lienholders (or reps) present

Distant lienholders often arrange for the buyer's lending institution to serve as their escrow agent, sending lien releases to that institution to be recorded only after the funds to pay off the lien have been forwarded to the lienholder

At closing, the buyer should receive a signed bill of sale from the seller.

Note: If the signature is incomplete, the FAA Aircraft Registry will reject the document and refuse to re-register the aircraft to its new owner until a proper signature is obtained.

14 CFR 47.3(b) prohibits you from operating an aircraft that has not been registered to its owner - if the paperwork on the transaction is not perfect this operates to ground the aircraft until the imperfection is corrected

The buyer should also receive a lien release signed by all lienholders who are executing these releases in exchange for that portion of the sale proceeds covering the balance of the debt still owed them

If the contract of sale has not been signed it must be signed by both buyer and seller at the closing

If you are financing the purchase of the aircraft the lender will require you to sign a promissory note and a security agreement giving the lender a security interest in the aircraft to secure payment of the loan 

Filings Required

Bill of sale, lien releases, and security agreement should then be filed with the FAA Aircraft Registry (by mail or in person) together with the FAA Aircraft Registration Application signed by the new owner

A street address or other physical location is required

The pink copy (pink slip) must be kept in the aircraft as the temporary registration certificate until the FAA Aircraft Registry issues a new Aircraft Registration Certificate in the new owner's name

The pink slip is legally adequate for flights in the US but international agreements require that you have the permanent registration on board before crossing international borders

An application for aircraft radio station license in the new owner's name must be filed with the Federal Communications Commission (FCC) if you intend to operate the aircraft across any international border

If a 406MHz emergency locator transmitter (ELT) is installed, that must be registered with the National Oceanic and Atmospheric Administration (NOAA) to facilitate search and rescue efforts in the event of activation

 

Tax and State Registration Requirements

The purchaser of the aircraft will have to pay either a sales tax or a use tax in their state of residence

If sale took place in that state of residence, then that state's goods sales tax applies

If sale took place out of state, and aircraft brought into that state, use tax applies

But these two taxes are pretty similar

In most states, the aircraft will also be subject to some form of annual personal property tax

The purchaser will have to pay a registration fee (typically based on aircraft weight) and a specific ownership tax (form of personal property tax based on aircraft blue book value)

Under most states' law, state revenue authorities automatically acquire a tax lien on aircraft for which these taxes have not been paid - this provides that upon request of state tax authorities, law enforcement officials may seize the aircraft and sell them in a sheriff's sale to satisfy the owners' unpaid tax liability

In many states, failure to register and pay state taxes on aircraft is also a misdemeanor (minor crime)

punishable by fines or jail sentences of up to one year

 

AOPA July 2017 - Tuning up your tax smarts

 

Depreciation recapture is the USA Internal Revenue Service (IRS) procedure for collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset that had previously provided an offset to ordinary income for the taxpayer through depreciation. In other words, because the IRS allows a taxpayer to deduct the depreciation of an asset from the taxpayer’s ordinary income, the taxpayer has to report any gain from the disposal of the asset (up to the recomputed basis) as ordinary income, not as a capital gain. Any gain over the recomputed basis will be taxed as a capital gain in accordance with section 1231 of the Internal Revenue Code (IRC). Depreciation recapture in the USA is governed by sections 1245 and 1250 of the IRC.

 

capital gain is a profit that results from a disposition of a capital asset, such as stock, bond or real estate, where the amount realised on the disposition exceeds the purchase price. The gain is the difference between a higher selling price and a lower purchase price. Conversely, a capital loss arises if the proceeds from the sale of a capital asset are less than the purchase price. Capital gains may refer to "investment income" that arises in relation to real assets, such as property; financial assets, such as shares/stocks or bonds; and intangible assets. 

The IRS carefully scrutinizes aircraft-related deductions to verify that they are:

- ordinary - common in the business the taxpayer is engaged in

- necessary - appropriate and helpful in the development of the taxpayer's business

- reasonable - amount must bear a "reasonable and proximate relation to the production or collection of taxable income, or to the management, conservation, or maintenance of property held for the production of income"

 

Helicopter Association International - Helis for sale

 

AOPA Buyer's Guide for used aircraft

 

AOPA Tips on Starting a Flying Club

April 4, 2016 - Petition of the Aircraft Owner and Pilots Association (AOPA) To Amend FAA Policy Concerning Flying Club Operations at Federally Obligated Airports

 

AOPA Sample Aircraft Purchase/Sales Agreement

 

Feb 2016 - Flying Magazine - Cutting the Cost of Airplane Ownership

 

flying clubs.pptx
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aircraft-buy-sell updated.pptx
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aircraft sales key terms.docx
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135form.pdf
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addresschange.pdf
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affidavitofheiratlaw.pdf
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affidavitofownership.pdf
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aircraftdeliveryreceipt.pdf
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aircraftinspectionreport.pdf
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amendmenttobillofsale.pdf
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billofsale.pdf
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dealerapplication.pdf
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declarationofinternationaloperations.pdf
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disclaimer.pdf
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exportrequest.pdf
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lienrelease.pdf
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llcsummary.pdf
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mechanicslien.pdf
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repo.pdf
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reregistrationapplication.pdf
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samplepurchaseagreement.pdf
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securityagreement.pdf
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setaside.pdf
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subordinationagreement.pdf
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warrantybillofsale.pdf
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ACFT prebuy_checklist.pdf
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Flying Magazine articles dealing with aircraft ownership:

How to Save Big on a Used Airplane

 

Contact Me

Sarah Nilsson, J.D., Ph.D., MAS

 

602 561 8665

 

sarah@sarahnilsson.org

 

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Legal Disclaimer

The information on this website is for EDUCATIONAL purposes only and DOES NOT constitute legal advice. 

While the author of this website is an attorney, she is not YOUR attorney, nor are you her client, until you enter into a written agreement with Nilsson Law, PLLC to provide legal services.

 

 

 

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