How The Sale of a Part Interest in a Tractor is Handled?
We had a reader ask the following question:
“I am slowly turning my farm operation over to my son. Each year I rent to him more of my farmland and he buys more of my equipment. I purchased a tractor in 2008 for $159,000 on which I took Sect. 179 of $137,000 on it. Can I sell a 1/2 share of this tractor to my son in 2012 & 2013 ($75,000 each year). I assume I would recapture 1/2 of depreciation (including Sect. 179) each year. Is this acceptable?”
Farming is one of the businesses where it is very common to own a partial interest in farm equipment. Many times, you will see a father/son, brother/brother and several unrelated third parties owning a partial interest in farm equipment that is used on each farm operation.
In this case, the sale of a tractor half-interest will result in ordinary gain based upon the sales price of $75,000 less his original cost of $79,500 and adding back all of the depreciation taken on the tractor including the Section 179 deduction of $68,500. None of it will be taxed at capital gains rates since the sales price is less than original cost.
One risk to watch out for is documenting properly the sale of a tractor half interest. If this is performed incorrectly, then tractor sale would be treated as an installment sale of 100% of the tractor and all depreciation recapture would be due in the year of sale even though the farmer only received half of his funds in that year. This may result in the taxpayer’s being in a higher tax bracket and owing more tax than actual cash received.
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.
Paul,
Not sure how to ask a question otherwise, so I am hoping to get a answer through the “Reply Button”on your blog.
I have a question on depreciating crops. How do I depreciate a blueberry tree crop that is currently producing a harvestable crop.
Scenario-
I buy a farm that produces blueberries, should I arrange to buy the blueberry trees separately (excluded from the real estate transaction) so that they would be a depreciable? or are they depreciable either way?
Also – Can you recommend a farmer friendly CPA in NH?
Thanks,
Brad