What’s my tax on selling equipment?

We had a reader ask the following question:

“If I sell my personal property that is all depreciated out.What will my tax be?”

As with most tax questions, the answer is “It depends”.

If you sell equipment for a sales price less than the original cost, then this gain is considered to be a Section 1245 gain and  is tax at ordinary rates.  Therefore, if you are in a 25% tax bracket, your tax will be 25% of the sales price (since the equipment is fully depreciated) plus any state income tax.

If you sell the equipment for more than what you bought it for, then the excess amount is considered a Section 1231 gain and this gain will be taxed at the favorable capital gains tax rate (unless you have a net 5 year carryover of Section 1231 losses).  However, in most states this will be taxed their regular state rates.

As an example, on the farm I grew up on, my father purchased a new Caterpillar D5b tractor in 1973 for $32,000.  He then sold this tractor in 1982 for $39,000 (yes, used equipment can increase in value).  The $32,000 would be taxed at their regular tax rate, while the extra $7,000 of gain would be taxed most likely at 15%.  If my parents had been in the highest tax bracket, then this part of the gain would be at 20%.  The 3.8% net investment income tax would not apply since this was a gain from the sale of business equipment.

As usual, what sometimes seems like a simple question can lead to a more complex answer.