Equipment Transfer Strategy

Jan 14, 2024 | Uncategorized

Often, the retiring family member(s) have the goal of transitioning equipment to the next generation, but don’t want to just have an outright sale. That would provide too much income and put the owners in a poor tax position. Also, it may not be feasible for the younger generation to outright buy all the equipment at once.

There are multiple different ways to transition farm equipment, and this publication does a great job of explaining the tax impacts of the various methods.

One example I recently came across is this:

An uncle is phasing out of farming and transferring equipment to his nephew.

Here’s their strategy:

Step 1. List all equipment to be transferred

Step 2. Get equipment appraised

Step 3. Discount each piece by 10% (family discount)

Step 4. Draft an equipment lease agreement w/

  • Annual lease payment
  • Option (but not obligation) to purchase specific items each year
  • Future lease payments reduced by equipment purchased
  • Flexible on items purchased, to correspond with farm profits each year
  • Upgrades: Uncle will sell item & nephew will buy upgraded item outside the lease

Step 5. In 5-7 years the lease is terminated if/when all equipment has been purchased.

As an example, Nephew has $200K income he’d like to offset, so before the end of the year he identifies a tractor and field cultivator he’ll purchase. He and Uncle execute a purchase agreement for those two pieces, and next year’s lease payment is reduced by a corresponding amount.

This does 3 things:

  1. Ensures Nephew can use equipment to farm, while giving him the option to buy.
  2. Spreads out sales for Nephew’s cash flow & Uncle’s income tax issues.
  3. Memorializes their handshake agreement should something happen to either of them.

If there’s a bad year, he doesn’t have to buy any equipment, he’ll just have the lease payment expense. Maintenance costs will be covered by the nephew, and major repairs by the uncle.

I’d discuss with your tax person and then have your attorney draft up the lease, if this is something you’re interested in. Just another tool in the toolbox!

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