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
* title services
- finalizing the deal
Sharing the cost -
* flying clubs (more than cost savings, encouragement and information, family activities, AOPA flying club resources)
Where to look -
* Airport Bulletin Boards
* Popular Websites
* Type Club websites (classifieds)
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
* interest rate depends on amount of loan and type of aircraft
* larger loans get lower rates
6.5% rate under $100K
(roughly equates to $250 a month)
* continuing ownership costs - aircraft operating costs calculator
1. monthly loan payment
6. Oil change (50-hour interval)
7. additional oil
8. overhaul reserve
9. Maintenance reserves
10. Annual inspection
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
4. Deposits (refundable or not)
5. Closing (use title and escrow services - have parties split cost
7. Delivery of aircraft
8. Transfer of title/risk of loss
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
* 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
* 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
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
Federal Income Tax
* business use - profit motive - ordinary, necessary, and reasonable - actual deductions are for % of hours that are business
* 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
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
Perfection and Priority
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
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
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
* bills of sale
* subordination agreements
* subrogation agreements
* 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:
The effective date of these changes is March 1, 2006.
- by filing - 2 steps
1. file with FAA Aircraft Registry
2. file with International Registry (must file with FAA first to be accepted)
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
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
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)
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
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.
A 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"
Feb 2016 - Flying Magazine - Cutting the Cost of Airplane Ownership
Flying Magazine articles dealing with aircraft ownership:
1. Discuss the process and terms of the auction involved in Godwin Aircraft v. Houston.
2. What is an Airworthiness Directive (“AD”)? Detail what import does it have, if any, in this case.
3. Define: (i) express warranty; and (ii) implied warranty.
4. Does the buyer’s opportunity to inspect the aircraft prior to sale relieve the seller of liability for any misrepresentation that the aircraft is airworthy? Should it as a matter of policy? Does your answer change if the seller merely omitted—rather than misrepresented—a fact about the aircraft for sale? Explain.
5. Do contractual disclaimers exculpate the seller of an airplane from liability for tortious misrepresentation under Tennessee law? Explain.
1. Identify the following parties and the relationship of each to the litigation: (a) Roger Smith; (b) the Shackets; and (c) Philko Aviation.
2. Detail the facts and claims of the case. What happened? Alternatively, what did not happen that should have?
3. What interpretation, according to the court, did Congress intend of Section 503(a)(1) of the Federal Aviation Act of 1958?
4. What is the relationship between “validity” and priority”? Discuss Matter of Gary Aircraft Corp. as part of your answer.
5. What is the holding of the case? What would happen if Philko had actual notice of the transfer or if, under state law, Philko failed to acquire or perfect its interest in the airplane? Is this fair?
1. Identify the following: (a) James and Sharon Hoots; (b) Randall Starcher; and (c) Mile High Adventures LLC.
2. What were the “terms” of the alleged oral conditional sale agreement?
3. How is an interest in an airplane perfected under 21 U.S.C. § 853(n)(6)? How do the petitioners claim an interest in the Cessna at issue?
4. What is the petitioner’s argument that they have a legal interest in the airplane? Does the court accept that argument? Explain.
5. What is a “bona fide purchaser for value”? Do the petitioners qualify as such purchasers here? Explain.
Case 52: United States v. Malago, 2012 WL 4378102 (S.D. Fla. 2012)
1. Identify: (a) Commercial Jet; (b) Silver Jet; and (c) U.S. Bank.
2. Explain the lien rights created by Fla. Stat. § 713.58. Further, explain how a valid lien is created pursuant to the statute.
3. How does the court describe Fla. Stat. § 329.51? What relevance does it have to Commercial Jet’s argument?
4. Is Commercial Jet authorized to foreclose on its lien, according to the court? Explain.
5. What is the dissent’s position about? Is the majority so obviously or clearly wrong? Explain.
1. Define: (a) replevin; (b) conversion; and (c) injunctive relief.
2. What is an escrow account? How was an escrow account used in this case?
3. What is a prejudgment writ of replevin, and what are the elements under Fla. Stat. § 78.055?
4. How was “reasonable probability” of a right to possession demonstrated to the court’s satisfaction here?
5. What jurisdictional argument did the lessee raise? Did the court agree? Explain.
1. Identify the following: (a) Rockbridge Commercial Bank; (b) Kaizen Aviation, LLC; (c) Tabas, Freedman, Soloff, Miller & Brown, P.A.; (d) Federal Deposit Insurance Corporation (“FDIC”); and (e) U.S. Acquisition, LLC.
2. What is action in replevin?
3. What is an attorney’s charging lien? How is it perfected?
4. Explain the appellant’s argument made on the basis of Creston Aviation, Inc. v. Textron Financial Corp.
5. As a practical matter, what is the result of this case?
Sarah Nilsson, J.D., Ph.D., MAS
602 561 8665
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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.