Farmer’s Guide to Machinery Depreciation, Stepped-Up Basis, and How Smart Planning Can Save Taxes on Farm Equipment

Farmers know the value of depreciation when it comes to reducing their tax burden year to year. Bonus depreciation and Section 179 deductions have helped many operations stay cash-flow positive and keep their tax bills manageable. But what happens to all that depreciation when you pass away? The answer could mean thousands of dollars in savings—or unnecessary taxes—depending on how your estate is structured.

At Wagner Oehler, we regularly help Minnesota farmers address these planning questions. One common issue we see is equipment that’s been fully depreciated—meaning it has a tax basis of zero. If you sell that equipment while you’re still alive, the entire sale price becomes taxable. Understandably, many farmers avoid selling older equipment because of the potential tax hit. But letting valuable machinery sit unused isn’t a great solution either.

Here’s where smart planning can make a big difference. When depreciated farm equipment passes through your estate at death, it generally receives a step-up in basis to its fair market value. This means your heirs can either sell it without triggering capital gains taxes or keep using it and start depreciating it again—effectively resetting the clock on its tax treatment.

But timing matters. To get the step-up, the equipment must be part of your estate or held in a properly structured trust. If you give away the equipment during your lifetime, the recipient instead receives your tax basis. That means they take the asset—and the tax problem—with them. As such, it is important that farmers work closely with a farm estate planning and their accountant to best structure their farm transition.

We’ve also heard from retired farmers who avoid selling their machinery for tax reasons, only to let it rust in the shed. There are alternatives. With the right planning, including tools like charitable remainder trusts (CRTs), you can sell equipment, generate retirement income, and reduce or defer the tax burden. See also: Charitable Remainder Trusts: A Smart Tax Strategy for Retiring Farmers.

So what should you do? Start by identifying what equipment is fully depreciated. Then review how it’s owned—personally, jointly, through a trust, or an LLC. From there, make sure your estate plan aligns with your tax and transfer goals. And if you’re thinking about gifting machinery before death, talk to your attorney and CPA first. (Hint: think you know who owns the equipment? Read more: Who Really Owns the Farm Equipment? Why It Matters for Estate Planning).

Farm equipment plays a huge role in your legacy. Don’t let poor planning turn it into a tax trap.

If you’d like help building a plan that protects your equipment—and the people who rely on it—visit wagnerlegalmn.com to schedule a strategy session with our team.

If you’d like to dive a little deeper into farm equipment and its role in the farm estate plan, check out this video: Farm Equipment in Estate Planning | How to Protect Machinery, Avoid Taxes, and Pass on Your Legacy.

To learn more about farm succession and estate planning, keep an eye on our Events page located at: https://www.wagnerlegalmn.com/events/.

If you’re ready to start being proactive about your estate plan, contact us to get started.

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