Strategically Trade Equipment

The days of the Federal like kind exchange are gone. I have heard some sadness from other accountants because of this. However, I have seen a few farmers turn lemons to lemonade when they have the opportunity to recognize a gain on the old equipment while taking full depreciation on the new equipment.


For example, for a farmer with a Schedule F subject to self-employment the gain on the old equipment is not subject to self employment tax while the depreciation on the new equipment reduces self-employment tax. This is a better situation than what would have resulted from the like kind exchange, where only the cash or financing put in on the trade was depreciated.


Almost all traded equipment will have tax basis of zero and let’s assume the trade value is $100,000 on a $200,000 piece of new equipment. The $100,000 trade value is recognized as gain on the old equipment, subject to income tax rates, but not self-employment tax, saving about $15,000. Let’s also assume the Schedule F before depreciating the new piece of equipment is $200,000, so taking Section 179 expensing election results in $0 net income on Schedule F and no self-employment tax.


If this were a like kind exchange, only $100,000 of depreciation would be available to offset the $200,000 of Schedule F income, resulting in about $15,000 in additional tax due from the self-employment tax on the net Schedule F of $100,000. Clearly, losing the like kind exchange treatment is a benefit in this scenario, which is not uncommon for most farmers.

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