Where Are the Best Used Equipment Buys?
Bargain prices, low- and no-interest loans, and other enticements such as certified pre-owned programs have certainly shrunk the once burgeoning supplies of late-model machinery and, particularly, tractors sitting on dealers’ lots.
Indeed, dealers are feeling more positive about their used inventories. In 2016, nearly 60% of dealers felt their used inventories were too high. That percentage has shrunk to 47%, according to a survey by the Association of Equipment Manufacturers and Equipment Dealers Association.
Yet, Successful Farming magazine’s analysis of late-model tractors finds significant numbers of certain sizes of tractors waiting for buyers. This is especially true of high-horsepower, front-wheel-drive models.
For example, a survey of late-model (2015 through 2017 model years) tractors up for sale by John Deere dealers as listed at machinefinder.com reveals:
- 315 four-wheel-drive (on tires) models 9370R up to 9620R listed.
- 345 tracked tractors (both two- and four-wheel drive) listed.
- 1,274 high-horsepower, FWD models 8245R up to 8370R were available.
- 560 medium-horsepower models 6140R up to 6125R listed.
Only 7 series tractors (models 7210R up to 7310R) were light, standing at 189 units available.
“We don’t face the used inventories of a couple of years ago,” says Jeremy Knuth of Heritage Tractors, which operates Deere dealerships in Kansas and Missouri. “We’re still aggressive in working with buyers to move the tractors out that we have on hand. There are a great many good deals in tractors to be found.”
Trade war effects on sales
The recent trade war and its direct effect on commodity and livestock prices has, however, put a damper on new and used tractor sales. As the end of the year approaches, dealers will likely be offering special buying opportunities to reduce inventories.
The dealer asking prices on page 33 provide a comprehensive price guide on nearly 2,000 late-model (2015 to 2017) tractors by various configurations.
A curious effect of the healthy supplies of late-model tractors is that it is driving up prices on older (10 to 20 years old) high-horsepower models. I compared recent (within the last six months) high-horsepower tractors of this age and found an average 10% to 15% increase in their dealer asking prices as well as auction values. “This reflects demand by farmers needing to upgrade tractors but doing so with older units, especially those tractors that are in excellent condition without a lot of hours for their age,” says Tim Meyer of the Steffes Group.
By Dave Mowitz
dealer asking prices and hours of late-model HP.
Four-Wheel Drive Tracks
High-Horsepower Single Tracks
High-Horsepower Front-Wheel Drive
Medium-Horsepower Front-Wheel Drive
Engine Man’s HP. Inspection Pointers
When in the market for pre-owned tractors, begin by speaking with the seller so you can glean as much of the history as possible. Ask if there are any maintenance records you can reference.
Next, inspect the tractor by looking for signs of fluid leaks on the engine and other areas. On larger diesels, check the crankcase ventilation tube and the area around it for excessive oil fumes. This is a strong indicator of worn piston rings and a glazed cylinder wall.
Remove the air filter and check what it looks like and the brand used. If it is extremely dirty or is an off-brand, that is not a good sign. Pull all dipsticks and inspect and smell the fluids. Remove the engine oil fill cap to check for sludge (lack of oil changes or use of cheap oil). If any white substance is present, there is either a coolant leak into the oil or a nonfunctioning crankcase breather. Not a good sign, either way.
Start the engine and listen for any sounds, how it runs cold, and if it goes into gear with a hydrostatic or automatic transmission. Check the exhaust for excessive smoke and note the color. Operate all systems, if applicable, such as hydraulics, PTO, etc. Be sure to drive the tractor around, which can reveal, for example, how smoothly it shifts or if the engine hesitates when accelerated.
If you are satisfied to this point, then make an investment in fluid testing. Using an extraction pump, pull samples from the radiator, engine oil, transmission, and hydraulic system. Hopefully, you can glean when the last service was performed by the records supplied to you or notations on the machine.
If the seller won’t let you pull samples and have them checked, walk away. On a diesel with wet cylinder liners, the coolant test is extremely important. The laboratory will include elemental analysis. If a good deal of iron is found in the coolant, that indicates cylinder liner cavitation erosion or, less likely, electrolysis. In either case, the engine is on the way out, and you need to know that.
invest in fluid analysis to verify
Do not be averse to spending the $100 for the fluid analysis for a prospective purchase that has passed muster to that point. Would you buy a farm field without a soil test? Then why do so many buy a piece of pre-owned equipment, no matter how low the hours, without fluid testing? You would be surprised what some people can do to an engine or transmission in a few hundred hours.
Finally, check the tire pressures, another telltale sign of the owner’s thought process. A fastidious owner will maintain the proper tire pressure for wear and to limit soil compaction.
The same logic and procedures for inspecting a potential purchase can be employed not only to farm equipment, but also to trucks, cars, UTVs, and more.
When you are selling or trading in, you want to get the most for the unit. Though price certainly comes into play during the purchase of a late-model pre-owned machine, the more dominant concern is the quality and the hope of reliable service. When you are investing in pre-owned, remember what President Reagan used to say: “Trust but verify.” The markets and weather hold enough uncertainties; you don’t need to buy any more surprises.
By Ray Bohacz
Trading hp. Without Like-Kind Exchange
In the past, you probably didn’t give it a lot of thought when you were in the market to replace horsepower. You bought a different tractor, traded in or sold your old tractors, and then told your accountant what you did. The recent Tax Cuts and Jobs Act has changed that process just a bit. The change comes into play when you speak with your accountant.
Before the tax law change, the new tractor was added to the depreciation schedule with a basis of cash paid plus the basis of the old. Under the new law, the new tractor is added to the depreciation schedule with a basis of cash paid plus trade-in value of the old tractor.
So what’s the difference? Let’s walk through it with some numbers.
Old Accounting With Like-Kind Exchange
For this example, let’s look at buying a new tractor and trading in your old tractor. The new tractor being purchased was negotiated to have a purchase price of $120,000. The dealer has agreed to allow $20,000 on the tractor you want to trade in.
On your depreciation schedule, the old tractor had $5,000 of basis left on it.
Starting from the top with the old tractor, there would be a gain on a sale of $15,000 ($20,000 trade-in value minus $5,000 basis).
With the old Like-Kind Exchange rule, that amount was ignored. The new tractor was put on the depreciation schedule with a basis of $105,000 ($100,000 cash plus $5,000 old tractor basis). That $105,000 would be available to depreciate.
New Accounting Without the Like-Kind Exchange
Now let’s look at the same situation using the new tax law, starting with the old tractor. Without Like-Kind Exchange, the $15,000 of gain will have to be recognized on the tax return.
The new tractor will be recorded on the depreciation schedule at the full purchase price. In this example, that would be $120,000 ($100,000 cash plus $20,000 trade- in). That $120,000 would be available for Section 179, bonus, or regular depreciation.
the idea behind the change
The end result is a recognized gain-loss on the old asset with depreciable basis of the new asset for the full purchase price. The Tax Cuts and Jobs Act passed in 2017 implemented some changes to help level out the process.
In exchange for requiring the recognition of the gain-loss, the new tax bill provides the ability to take more depreciation faster.
The first change is with Section 179 of the IRS code. The new tax bill increased the S179 deduction to $1 million with a phase-out threshold amount of $2.5 million.
The second change is with depreciation. Bonus depreciation is now available for new and used assets with a depreciable life of 20 years or less. The bonus depreciation will also be available through 2022 at 100%, and will then begin to drop 20% each year until it reaches 0% after 2026. In short, for the first few years, you will have unlimited depreciation capabilities given that the bonus depreciation has no cap.
what about local personal property
When I talk about this change in meetings with farmers, participants are quick to pick up on the possible local tax implications.
If we’re required to submit personal property tax information each year to your local county tax assessor, then the new way of calculating depreciation on machinery purchase will result in an increased basis of the new tractor. That is one down-side of this new method.
By Austin Duerfeldt, University of Nebraska Economist
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