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What’s Your Used Farm Equipment Worth?
Early last December, I was sitting in a tractor cab trying to stay warm. The temperature was hovering around 20°F. at a sale I was covering it for the Successful Farming Show television program. The crew at Wieman Auction (the firm conducting that day’s consignment sale) had started one of the tractors on the auction block that day, a Deere 8320R. I was waiting for this particular tractor to sell and figured it was as good as any place to warm up.
About the time my teeth stopped chattering, a farmer climbed up the 8320R to give it a look. With a smile, he asked if the tractor appeared to run good. “The heater is sure topnotch,” I replied stepping around so he could appraise the cab.
Later, as I stood outside the tractor, the guy came down, took a good look at me, and recognized me from my auction reports on the television show. After exchanging pleasantries, I asked if he was interested in the 8320R. Turns out he was considering the tractor to replace a 2015 Deere 8295R.
We talked about 8320R values, and I inquired about his 8295R, asking what he thought he could get out of the tractor. I recall how he hesitated, mumbled something about whatever his dealer would give him along with references to recent auction prices adding, with a nervous laugh, that his banker would have a say in the matter, as well.
“What do you think it’s worth?” he asked.
pinning down prices
That is the million-dollar question these days considering commodity prices plus the fact that iron values, I have come to learn, vary a great deal depending on marketplace (dealer vs. auction prices, for example) and if those values are being applied to a loan application. “Certainly, when it comes to applying for a loan, the more accurate your inventory (of machinery on hand) and its value, the more impact it can have on justifying a loan request,” says Tina Barrett, executive director of Nebraska Farm Business Inc. “The common practice by bankers to determine machinery value is to take 10% off of its depreciation value.”
Barrett coaches that if you want to put your own value on your fleet of machinery rather than accept that common banker’s practice, then you should be accurate (quoting reliable sources), be reasonable (with your evaluation), and be consistent (using that declaration method every year). “Don’t use your evaluation one year and then go with the 10% off of depreciation the next year,” she advises.
valuations vary by transaction
Loan values are not the most accurate method of determining a bidding limit at auction, whether the asking price at a dealership is a good deal or a good deal too much, or whether the price a dealer is willing to give on a trade-in is reasonable.
Any of those situations demands a different valuation, says Larry Perdue, executive director of Asset Appraisal Corporation in Edmond, Oklahoma. “Just finding out what a machine sold for – whether it was by a dealer or at an auction – is not always a true reflection of the value,” he says. “People ask me all the time, ‘What is this worth?’ My answer is, ‘To whom for what?’ How do you plan to use the appraisal?”
Perdue says a number of different values are attributed to virtually any item, including machinery. They include replacement cost, fair market value for continued use, fair market value exchange, court-ordered liquidation values, and forced-sale liquidation values.
One problem with undervaluing equipment, he says, is that in the event of loss from theft, fire, tornado, or a flood, the burden of proof is on the insured to prove that the equipment was worth more than the insurance company has established as its value.
“Unless the owner has a policy for “actual replacement cost,” which is seldom the case, the producer is only awarded average value,” Perdue adds. “Unfortunately, that value doesn’t take into account the number of hours on the machine, the extra options, or the time of the year, which can also affect farm equipment values – particularly on seasonal equipment like planters and combines.”
On the other hand, if you’re wanting to borrow money using an auction-purchased tractor as collateral, you may be selling yourself short, since the fair market value appraisal would actually allow borrowing more money.
Other situations in which an appraisal can be valuable include financial planning, estate and gift taxes, partnership dissolutions, litigation, and divorces.
be specific with comparisons
The mercurial nature of values becomes most apparent when trying to put a price on equipment that is being traded in vs. sold outright or being bought from a dealer vs. at auction, for example.
“I am willing to tell customers what I think a piece of equipment up for sale is generally worth,” observes Dan Sullivan of Sullivan Auctioneers. “When they ask me how much a piece of equipment they own is worth, I hesitate, and warn them that it depends on its use (in hours), condition, and how it’s equipped (specifications).”
All of the experts interviewed for this article as well as for past Machinery Insider reports in Successful Farming magazine or on the Machinery Show television program agree with Sullivan’s advice that it pays to be as exact as possible describing equipment when establishing comparable marketplace values.
Some of the most profitable time you invest this year could be spent searching websites to unearth prices, ordering an appraisal through Iron Solutions, or seeking the opinion of an appraisal company.
One Example of How Values Vary By Source
The 2015 John Deere 8295R tractor the South Dakota farmer was trying to put a value on prompted me to take an in-depth look at the values the marketplace puts on used equipment using that specific tractor as my test subject. The disparity among the values I uncovered was surprising.
To begin with, I followed the actual sale of a 2015 model 8295R with 1,610 hours (described in the table on the opposite page). I then downloaded the prices on 229 4-year-old model 8295Rs that were either sitting on dealers’ lots or had sold at auction and crunched all those numbers to create price ranges and averages. To provide a solid comparison to those ranges and averages, I ordered an appraisal from Iron Appraiser (a service provided by IronSolutions.com).
All this number crunching revealed how values can vary widely based on the source of information (auction vs. dealer asking prices, for example) as well as machinery condition (primarily determined by hours of use) and how it is equipped.
How to interpret all these prices
So are any of the values more accurate than others? That depends on how you plan to use the information. Overall, values generated by Iron Appraiser (at a cost of $19.95 per appraisal) are the most accurate since they are based on actual dealer trade-in or sales transactions. Iron Appraiser also takes into consideration auction sales of equipment.
The advantage to these appraisals is that they peg values based on specific information (such as condition and hours of use) and specifications (including options). This allows you to establish a value specific to the machine you own or are interested in buying or selling. Thus, an Iron Appraiser valuation establishes a solid, actual price value that can be used when applying for a loan, establishing basis (for tax purposes), pegging a specific trade-in value, or weighing the value of a machine up for sale on a dealer’s or auction lot.
By way of explanation, the disparity between the “buying” vs. “trade-in” appraisals from Iron Appraiser is due mostly to considering the reconditioning costs a dealer would spend making a used unit suitable for resale, explains David Davidson of Iron Solutions. “These reconditioning costs can vary widely based on a number of factors. Often, tires, tracks, and other components are involved in a dealer’s reconditioning cost to prepare a trade-in for resale,” he says.
As an alternative, you can get two free equipment estimates from Iron Solutions by going to Agriculture.com/whatsitworth.
What about dealer, auction averages?
So was there any justification to me spending time downloading and then crunching all those dealer asking prices? I don’t think I would want to make a trade-in or purchase based on those values. And those figures are less believable to a banker. Yet, they do offer a valuable comparison when it comes to equipment hours and options, for example, when shopping around for equipment.
That’s why I did a deep-dive look at dealer asking prices for 8295R by hours and certain specifications.
Take a look at the price average by hours. In the past, you might have assumed that low-hour tractors always brought premium prices. However, there was a mere $140 between tractors with 751 to 1,000 hours compared with those that had 1,001 to 1,500 hours. That represents an extra year or more of use for some farmers if they bought a tractor with 751 to 1,000 hours before that tractor faced major repair costs.
What about options? Look at the $750 difference between 8295Rs equipped with an IVT compared with a standard powershift transmission. That’s a small premium to pay for this advanced technology, as I found was also the case when comparing tractors with dual tires all around or those equipped with a front-axle suspension system.
You can generate similar dealer asking prices by accessing manufacturer dealer listing websites. Websites like ironsearch.com, tractorhouse.com, and fastline.com offer a wealth of dealer lists. One of the best features of these sites is that they allow you to filter (or narrow) a search not only by make, model, and year but also by hours and specifications.
Auction prices, on the other hand, offer a restricted view of values that can be erratic as “multiple factors can impact the results of an auction sale, from the quality of the pre-event advertising to the weather on the day of the event,” says Cameron Hunard of Iron Solutions. “There are many more (dealer) retail transactions available due to the fact that auctions account for only a fraction (around 20%) of the sales.”
VALUES ON 2015 JOHN DEERE 8295Rs
Appraisal Values by Source
2015 model, 1,610 hours, standard transmission, standard front axle, rear duals only, front and rear weights
|Actual dealer sale of the tractor (described above)||$188,950|
|Iron Appraiser buying appraisal||$188,504|
|Iron Appraiser trade-in appraisal||$151,397|
|Dealer asking price average (based on 8295Rs with 1,600 to 1,700 hrs.)||$193,100|
|Auction sale price average (based on 8295Rs with 1,600 to 1,700 hrs.)||$167,800|
A Deep-Dive Look at Dealer Asking Prices
|Average Price||Price Range|
|0 to 500 hrs.||$222,600||$199,900 to $259,000|
|501 to 750 hrs.||$211,800||$184,900 to $239,500|
|751 to 1,000 hrs.||$202,900||$188,100 to $249,900|
|1,001 to 1,500 hrs.||$202,760||$172,500 to $245,000|
|1,501 to 2,000 hrs.||$193,430||$171,000 to $229,900|
|2,001+ hrs.||$177,700||$146,000 to $193,200|
Dealer Prices by Options
|Average Price||Price Range|
|With standard front axle||$199,500||$165,000 to $232,500|
|With suspended front axle||$211,900||$179,900 to $259,000|
|With standard transmission||$194,650||$165,000 to $232,500|
|With IVT transmission||$204,600||$179,900 to $259,000|
|With rear dual tires||$189,500||$165,000 to $219,000|
|With front and rear duals||$190,250||$172,500 to $259,000|
Geographic impact on equipment prices
At one time, geography had a substantial impact on the value of used equipment. But the influence of Internet sales has blurred geographic differences in used values due to the ease with which farmers can buy, finance, and make transportation arrangements from the comfort of an office anywhere in the country. “Anymore, it is not unusual to have as many as 50% of the buyers (at our auctions) participating online, and many of those buyers are from out of state,” says Tim Meyers of Steffes Group. “Having that many more buyers involved can drive up paid prices, particularly on late-model, low-hour machinery.”
Still, geography occasionally exerts influence on used iron, observes Gary Schnitkey of the University of Illinois. He cites higher crop yields in the Midwest during 2016 as an example. “Much of the Corn Belt and Mississippi River basin had above-trend yields (that year),” Schnitkey remembers.
At the same time, yields suffered in parts of the Northeast and Southeastern states. Areas where bean yields were best saw stronger used machinery values, while values were softer in lower-yield areas, Schnitkey observes.
Yields aside, it is still a good bet that equipment originating in the Corn Belt generally has higher values than iron found in other parts of the country. This is due to perception that Midwest machinery is better cared for and has had fewer hours, notes Dan Sullivan of Sullivan Auctioneers.
The exception to this trend occurs with tillage equipment. Since it’s more difficult to transport, its geographic market is limited.
Beware of recaptured depreciation when exchanging iron
If you are selling or trading in equipment or employing creative financing like a purchase leaseback, be sure to talk to your accountant if that transaction creates a tax liability.
“In the past, we have not needed to worry about anything but the boot difference paid on a trade (of equipment). However, a change from the Tax Cuts and Jobs Act (in 2018) is that we must ‘sell’ the old asset for the trade-in value and put the new asset on the depreciation schedule with the full fair market value,” explains Tina Barrett of Nebraska Farm Business Inc. “This can generate significant taxable income, so you’ll want to make sure you have planned on the recognition of this sale. For many operations, this could be hundreds of thousands of dollars in new gain you may not be used to.”
According to Kristine Tidgren at Iowa State University’s Center for Agricultural Law and Taxation, regulations preserve like-kind exchange treatment for real property but eliminate it for personal property. “Now, equipment or livestock ‘trades’ will be treated as taxable events, with the taxpayer computing 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,” Tidgren explains. “The amount realized includes any money, as well as the fair market value of property (other than money) received in the transaction.”
To help explain this rather confusing set of rules, Tidgren offers up an example.
“Suppose Sam trades a tractor with a fair market value (FMV) of $75,000 and an adjusted basis of $0, plus $50,000 cash for a tractor with a fair market value of $125,000. For that tax year, this transaction will be treated as a sale and a purchase.
“Sam must now recognize $75,000 in recapture (the difference between the FMV of the traded tractor at $75,000 and its adjusted basis of $0). This transaction will be reported on Part III of Form 4797 and taxed as ordinary income (no self-employment tax). Sam uses the proceeds of the sale, plus an extra $50,000 in cash, to purchase the new tractor.
“Thus, Sam’s basis in his new tractor will be $125,000, the full purchase price of the new tractor. Sam can likely expense this amount. If Section 179 is not available, he can use 100% bonus to capitalize and depreciate the full amount.”
More than ever, your tax accountant is going to be a significant business partner to help you work your way through the tax code, Tidgren urges.
Receive two free equipment appraisals a month from Iron Solutions by going to Agriculture.com/whatsitworth.