What Is The Tax Rate On Gifted Equipment?
We had a reader ask the following question(s):
“Paul, in regard to the capital gain question-we are in the process of purchasing a new corn planter. If we sell the old one for cash, how much will the capital gains tax be on it? 15% or normal income tax rate? It was gifted to us many years ago from my father. So the basis would be zero dollars. The new purchase would be section 179.”
When a farmer acquires a piece of equipment in the form of a gift, the basis to the farmer is the lower of fair market value or the basis in the hands of the person making the gift. In most cases, the equipment has been fully depreciated before gifting it away, therefore, the basis is zero. However, the person receiving the equipment must determine what the original cost of the equipment and accumulated depreciation since the equipment is still considered to be Section 1245 property (even if the person receiving the equipment is not farming).
This means that when the farmer sells this gifted property, the sales proceeds up to the original cost is ordinary income and any proceeds over original cost would be capital gains (subject to certain look backs for Section 1231 losses taken in the last five years).
So, the bottom line answer for our reader is that the sale of the equipment will be ordinary income up to the original purchase price and capital gains on any excess. If the farmer is self-employed, the sale of the equipment will not be subject to self-employment taxes and the Section 179 on the new piece of equipment will reduce self-employment taxes.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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