or those individuals who may be interested in purchasing an aircraft, we have compiled a brief description of steps that are necessary to complete the transaction once you have selected an aircraft to purchase. For any potential aircraft owner, it is important to understand the basics of the process prior to purchasing an aircraft.
Non-Binding Letter of Intent
Once you have identified an aircraft to purchase, it is customary for the buyer to issue a non-binding letter of intent identifying the aircraft and engine make/model/serial number. The letter of intent will also spell out the proposed purchase price and deposit amount, as well as other details of the purchase process. It is important to note that the letter of intent is non-binding and may be cancelled without penalty by either party prior to the execution of the purchase agreement.
A purchase agreement begins by identifying the parties entering into the contract. The purchase agreement must incorporate all terms of the letter of intent. It will also specifically identify the aircraft, engines, purchase price, and deposit. Generally, the deposit is wired to an escrow agent contemporaneously with the execution of the purchase agreement.
Pre-Buy Inspection and Squawk List
Upon execution of the purchase agreement, the aircraft usually undergoes a pre-buy inspection by a certified maintenance shop. Once the inspection is completed, the maintenance shop will issue a list of discrepancies generally referred to as a “squawk list.” The squawk list includes both airworthy and non-airworthy items. A well-crafted purchase agreement will include a provision which requires the seller to either correct all airworthy items or the buyer may cancel the agreement and the seller is responsible for all costs and fees including the pre-buy inspection costs.
Acceptance and Closing
Once the squawk list is provided, the buyer usually has 3 to 5 days to accept or reject the aircraft. If the buyer accepts the aircraft, then the deposit becomes non-refundable. If the aircraft is rejected, then the deposit is returned to the buyer and the aircraft is returned to the seller. Once the aircraft has been accepted, the parties will usually close within 3 to 5 business days from the completions of all airworthy repairs, unless this timeframe is extended in writing by both parties. Once the transaction has closed, the aircraft, and its new owner must be registered with the appropriate state, federal, and international authorities.
Prior to the closing, the buyer must have insurance in place to immediately cover the aircraft upon taking receipt. The seller is only responsible for losses which occur prior to the closing. This is an often overlooked and problematic area for a buyer as the costs resulting from the failure to properly ensure the aircraft can be financially catastrophic.
The buyer may choose to lease the aircraft to a charter operator to provide an income stream as well as to defray some of the costs associated with maintenance and management of the aircraft.
This is a general list of steps which arise in most aircraft purchase and sale transactions. However, each transaction contains unique aspects which may require additional action on the part of the buyer or seller. It is important to seek the assistance of an attorney or other professional if you are considering purchasing, selling, or leasing an aircraft.
The information on this site is not intended to provide specific legal advice nor does it create an attorney-client relationship. An attorney-client relationship may only be created through an explicit agreement with our firm.
IRS CIRCULAR 230 DISCLOSURE: To comply with requirements imposed by the Department of the Treasury, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written by the practitioner to be used, and that it cannot be used by any taxpayer, for the purpose of (i) avoiding penalties that may be imposed on the taxpayer, and (ii) supporting the promotion or marketing of any transactions or matters addressed herein.
Our use of a disclaimer does not change the high degree of care and attention that we devote to our tax advice. Moreover, the inclusion of the disclaimer does not indicate that penalties could be imposed on the transaction at issue, but rather merely indicates that the advice we have provided you in such communication does not preclude the IRS from asserting penalties. Finally, please be assured that the use of such a disclaimer to avoid unnecessary legal expenses is similar to the approach adopted by most other tax practitioners.