Fair Market Value vs $1 Buyout Aircraft Leases: Which Fits Your Operation?
A fair market value (FMV) aircraft lease lets you buy the aircraft at the end for whatever it is then worth, so payments are lower but you carry price uncertainty. A $1 buyout lease lets you buy for a nominal amount, so payments cover nearly the whole price and the deal works much like a loan. The choice mostly turns on whether you want to own the aircraft long term and how you want the lease treated for accounting and tax.
Key takeaways
- An FMV purchase option is priced at the aircraft's value when you exercise it, so you do not know the buyout price in advance.
- A $1 buyout is a bargain purchase option: the lessee pays down almost the full price through rent and ends up owning the aircraft.
- Under US lease accounting a $1 buyout is generally a finance lease; an FMV option usually is not by itself, but other tests can still apply.
- For tax, a nominal purchase option is a classic sign that the IRS may treat the deal as a sale, not a lease. Confirm with a tax advisor.
- Compare offers on total cost to own, not on the monthly payment alone.
What is the difference between a fair market value lease and a $1 buyout lease?
The difference is the price you can pay to own the aircraft when the term ends. In a fair market value (FMV) lease, that price is whatever the aircraft is worth at that time. In a $1 buyout lease, it is a nominal amount, so you have effectively paid for the aircraft through your rent.
That one clause changes almost everything else: the size of the payment, who carries the risk if used-aircraft values move, how an accountant classifies the lease, and how the IRS may view it. If you are still weighing structures, start with our overview of aircraft leasing and the guide to operating vs finance leases.
How does a fair market value purchase option work?
An FMV option gives the lessee the right, but not the duty, to buy the aircraft at the end of the term at its then-current value. The lease normally says how that value is found, often by independent appraisal, and what happens if the two sides disagree. Because the price floats, the lessor does not need rent to recover the full cost of the aircraft. It prices the lease on an expected residual value instead. We explain that mechanic in how lessors price an aircraft lease.
What this means in practice:
- Lower payments. You pay for the use of the aircraft over the term, not for all of its price.
- A flexible exit. You can return the aircraft, extend, or buy it. Return conditions then matter a great deal; see what operators must hand back.
- Price uncertainty. If the aircraft holds its value well, the buyout is higher than you may have hoped. If values fall, you can buy cheaply or simply return it.
- No equity build-up. Rent payments do not reduce the buyout price, because the price is set by the market.
How does a $1 buyout aircraft lease work?
A $1 buyout lease sets the purchase option at a nominal amount, often $1. Since the lessee will almost certainly exercise an option that cheap, the lessor prices rent to recover the aircraft's cost, financing charges and its return over the term. In substance the lessee is buying the aircraft in instalments.
The trade-offs are the mirror image of an FMV lease: higher payments, no meaningful residual-value risk for the lessee, and a clear path to ownership. Many operators who want to own the aircraft long term compare this structure directly with a secured loan. You can model the loan side with our aircraft loan calculator, then compare it with the lease vs finance calculator. The broader finance lease structure is covered on our finance leases page.
How do the two structures compare side by side?
| Feature | FMV purchase option | $1 buyout |
|---|---|---|
| Buyout price | Fair market value at exercise | Nominal, such as $1 |
| Typical rent level | Lower; priced on expected residual | Higher; priced to recover nearly all cost |
| Residual-value risk | Shared; you decide at the end | Effectively none for the lessee |
| Ownership at end | Optional | Expected |
| Return conditions | Important, since you may hand the aircraft back | Less important if you keep it |
| Lease accounting (ASC 842, lessee) | Depends on the five classification tests | Generally a finance lease |
| Tax treatment | More likely a true lease | Risk of being treated as a sale |
What does the difference look like in numbers?
The figures below are hypothetical and only illustrate the logic. They are not quotes, market rates or JetFinex data, and they ignore interest, taxes and fees to keep the arithmetic visible.
On those assumptions, the FMV lease needs roughly half the rent because the lessor expects to recover the rest from selling the aircraft or from your buyout. If the aircraft is really worth $500,000 at the end and you buy it, your total outlay is about the same as under the $1 buyout, before financing charges. If it is worth $650,000 you pay more; if it is worth $400,000 you pay less, or return it. The FMV structure is a choice about who holds that uncertainty.
How is each structure treated for accounting?
Under ASC 842, a lessee classifies a lease as a finance lease if it meets any one of five tests, one of which is a purchase option the lessee is reasonably certain to exercise (Deloitte, 8.3). A $1 option on a valuable aircraft will almost always meet that test, so the lease is generally a finance lease and the lessee records a right-of-use asset and a lease liability.
An FMV option is not a bargain, so it does not by itself make a lease a finance lease. Whether you are "reasonably certain" to buy at fair value depends on contract, asset, market and entity factors, such as the option's terms and your past practice with purchase options (Deloitte, 6.4). The other tests, including lease term against the aircraft's economic life, can also make the lease a finance lease. Classification is set at commencement and generally reassessed only on a modification or a change in the lessee's assessment of the purchase option. Your auditor decides the treatment, and The CPA Journal's lessee illustrations show how the numbers flow.
How does the IRS look at a nominal purchase option?
For federal tax, the question is whether the deal is a true lease or a conditional sale. The IRS lease guidelines in Rev. Proc. 2001-28, which apply to advance rulings on leveraged leases, state that no member of the lessee group may have a contractual right to buy the property from the lessor at a price less than its fair market value when the right is exercised. They also require the lessor to show that at least 20 percent of the original cost is a reasonable estimate of the aircraft's end-of-term value. A $1 option fails the first test by design, which is why $1 buyout deals are commonly treated as financings for tax purposes, with the lessee taking depreciation and interest deductions in place of rent.
Those guidelines are written for ruling requests, not as a legal definition of a lease, and they cover a specific kind of transaction. Whether your deal is a lease or a sale for tax purposes depends on its facts, and the answer affects who depreciates the aircraft. Confirm the treatment with a tax advisor and aviation counsel before you sign. This article is general information, not tax or legal advice.
Which structure fits which operator?
Use these questions as a checklist.
- Do you want to own the aircraft in five or ten years? If yes, a $1 buyout or a loan usually fits better than an FMV lease.
- Is the aircraft type likely to be replaced on a schedule? Fleets on a refresh cycle, such as some training and charter operators, often prefer the flexibility of an FMV lease.
- Can you absorb residual-value risk? If a large buyout at the end would strain your cash, plan for it now or choose the structure that fixes the cost up front.
- Who will depreciate the aircraft? Ask your tax advisor how each structure would be treated before comparing payments.
- How strict are the return conditions? A lessee who may return the aircraft needs to price maintenance and condition obligations into the comparison.
NBAA's aircraft leasing resources are a useful neutral starting point for flight departments comparing these structures. Ask every lessor for the purchase-option wording, the appraisal procedure, any early buyout rights and the total cost under each scenario in writing, and compare offers on total cost to own rather than on monthly payment alone.
When you are ready to compare real offers, you can start a deal file with JetFinex and set the lease options out side by side.
Aircraft Lease vs Finance Calculator
Total cost of leasing versus buying over the same term.
Want the payment on a specific aircraft? Try the aircraft loan calculator: set the price, down payment, rate, term and balloon and see the monthly payment and total interest.
Frequently asked questions
What is a fair market value lease on an aircraft?
It is a lease in which the lessee may buy the aircraft at the end of the term for its then fair market value, usually set by an appraisal process written into the lease. Because the buyout price floats, rent is typically lower than on a $1 buyout lease.
What is a $1 buyout aircraft lease?
It is a lease with a purchase option of a nominal amount, often $1, at the end of the term. Rent is set to recover essentially the full financed price plus the lessor's return, so it behaves like a secured loan with a lease label.
Is a $1 buyout lease a finance lease?
For lessee accounting under ASC 842, a purchase option the lessee is reasonably certain to exercise makes the lease a finance lease, and a $1 option on a valuable aircraft clearly meets that test. Your auditor makes the final call.
Can I walk away from an FMV lease at the end?
Usually yes. The purchase option is an option, not an obligation, so you can return the aircraft in the condition the lease requires, extend, or buy it at fair market value.
Which is cheaper, an FMV lease or a $1 buyout lease?
The FMV lease has lower payments, but you may pay a large buyout later. The $1 buyout has higher payments and no meaningful buyout. Total cost depends on the aircraft's actual end-of-term value, which no one knows in advance.
Sources
- IRS, Internal Revenue Bulletin 2001-19 (includes Rev. Proc. 2001-28, leveraged lease guidelines)
- Deloitte DART, ASC 842 Roadmap: 8.3 Lease Classification
- Deloitte DART, ASC 842 Roadmap: 6.4 Exercise Price of a Purchase Option Reasonably Certain to Be Exercised
- The CPA Journal, Practical Illustrations of the New Leasing Standard for Lessees
- NBAA, Aircraft leasing
This guide is educational and is not tax, legal or investment advice. See our editorial standards and disclosures. Spot an error? Tell us.
