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Trade In Iron or Sell It Outright . . . What Makes More Money?
If you need to replace equipment, take time to put a pencil to the differences between trading in vs. selling your old equipment outright and then buying replacements. The way that equipment is replaced can result in a difference of thousands of dollars in annual production costs.
One of the first things often thought of is the risk the producer holds by buying the new piece while still holding the older piece, and whether or not it will sell, points out Nate Edlefson of the University of Illinois’s FBFM (fbfm.org). “This risk must be weighed with what is thought to be an appropriate trade-in value, but one thing that is often not thought of are the tax advantages that may be realized via the outright sale of the existing piece.”
This tax advantage is due to the fact that equipment sales for items listed on a depreciation schedule are shown as income on form 4797 of the tax return, while purchases are listed on the depreciation line of the schedule F for the sole proprietor farmer. For all income shown on a schedule F, self-employment tax is imposed. Income from machinery sales on 4797 is not subject to self-employment tax, thus the potential for tax savings, Edlefson explains.
Another very general rule that is sometimes employed is to consider trading in if a taxable loss will result from that transaction. Sell old equipment outright and buy a replacement if a gain will result from the sale and you are in a low tax bracket.
If you are seeking a comparison of trade-in vs. private treaty values on equipment, you can utilize a free machinery valuation tool offered by Successful Farming and Iron Solutions. The What’s It Worth calculator can be found here. Using this service you can obtain trade-in values on equipment that was built in the past 20 years.
To get a handle on private treaty values, you can search the “Auction Results” of websites like auctiontime.com.
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