February 5, 2018
Each month in Wallaces Farmer, the Timely Tips panel answers questions sent by readers. Members of the panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa.
We will need a bigger planter this spring, as we just rented another 500 acres. Is this the time of year to trade? We will consider new or used. What are the income tax implications of buying new vs. used? Would we be better off buying a new planter, considering the federal tax reform bill that was signed into law in December? My understanding is the new law will begin to take effect on machinery purchased in 2018.
Stout: This would indeed be a good time to trade planters. I haven’t read the several hundred pages of new tax law, but in reading highlights I don’t think there are any advantages to buying new over used. You should just negotiate the best deal that meets your needs to get the additional acres planted in a timely manner. The Section 179 tax deduction has been included in the new tax bill with the maximum amount increased, so that advantage is still in effect — new or used.
Plastina: The new tax law changes the tax calculations for farmers looking to trade equipment or livestock in 2018. Without any intention to provide legal advice, I will summarize the most relevant changes in the tax law reported by Kristine Tidgren, assistant director of the Iowa State University Center for Agricultural Law and Taxation:
■ Gains or losses on the exchange of like-kind personal property used in farming that were generally deferred are now treated as taxable events. The taxpayer must compute the gain or loss based upon the difference between the amount realized on the sale of the relinquished asset and the party’s adjusted basis in the asset. “Amount realized” includes any money, as well as the fair market value of property (other than money) received in the transaction. There will be no tax deferral for gains or losses, or income recapture.
■ The new law created an “enhanced” bonus depreciation that allows up to 100% bonus depreciation for qualifying personal property acquired and placed into service in 2018.
■ The new law provides that the enhanced first-year bonus depreciation applies to used property as well as new property.
■ Section 179 was expanded to provide an immediate $1 million deduction with a $2.5 million phaseout threshold in 2018, which will be indexed for inflation starting in 2019.
■ It is important to keep in mind that some states might not conform to federal tax law, and this can have large implications for taxpayers. For a more detailed discussion with numerical examples, see calt.iastate.edu/blogpost/how-does-new-tax-law-act-impact-equipment-trades.
Miller: Assume the newly leased 500 acres is for more than one year. If not, you will have added risk by taking on the extra cost of a newer planter without knowing if you will need it for more than one year. However, there might be some technology upgrades that allow you to do a better job of planting so that you are saving on seed to offset the cost of the increased machinery expense.
I’m not a tax expert, but from my research, it appears that the law allows 100% bonus depreciation for new or used machinery. Thus, I would look at a used planter, so you keep the cost down.
My wife and I are 67 years old. We were planning to sell our 250-acre, 70-cow dairy farm to a young couple this spring, but they changed their minds. We are weighing our options, wondering if we should sell the cows and machinery and rent the land to a neighbor, or continue to try to find a buyer for our farm. We’ve had the farm for sale for a year now. We are both in good health. Our other option would be to try and sell the land, and keep the house and buildings and continue to live on the farm. We don’t have any debt. What are your thoughts?
Stout: I like your idea of selling to a young couple; it’s unfortunate that the sale fell through. Iowa has a Beginning Farmer Tax Credit program that may be available if you would be willing to rent to a beginning farmer. There is also a Beginning Farmer Loan Program to assist a beginning farmer in purchasing or leasing your farm. You are in a good position with no debt to do any of the options you mentioned. There could be capital gains tax on cows, machinery and land, so check with your tax preparer before choosing which option. It might be best tax wise to spread the sales out over two or three years.
Zhang: There is no perfect decision. The right answer for your family depends on your need for your golden years and on your purpose of owning a farm. The Iowa Farmland Ownership and Tenure Survey shows land is often owned for current income, or long-term investment, or for family or sentimental reasons.
Once you are clear about your goals for your farm through consultation with your family, you could evaluate the trade-off among the two options, or conduct a mini-benefit-and-cost analysis.
Selling your equipment and renting out the land to your neighbor will likely generate a decent annual rental income of $60,000. If you still want to have ties with farming or your farm home in some way, then renting the land to your neighbor or living on the farm could be good options. If you are ready to embark on new adventures in a new town, now could be a good time to sell the land or farm.
The Iowa farmland market has recently seen a 2% bump up over the past year due to limited buyers. If you want to go that route, consult an appraiser or a broker regarding how the market fares in your local area, and who might be interested in buying your farm.
Miller: If the cows are getting to be too much work, it’s probably time to sell them and the machinery— assuming you don’t want to farm row crops anymore. You can keep looking for a buyer on the farmland, but in the interim, rent it out. For most operators it helps to balance out the tax burden if you sell your livestock and machinery one year and sell the land a different year.
If you are not in an area where acreages are a hot commodity, I would plan to sell the buildings with the farmland. When setting your price, keep in mind that dairy buildings do not have much value for a buyer because of the poor economics in the dairy industry.
Some landowners with heirs, prefer to rent out their land until death so they don’t have to pay capital gains taxes on the increased value of the land. Instead, it can pass to the heirs at a stepped-up basis.
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