Can I still do a like-kind exchange on farm equipment?

Section 1031 lost personal property at the end of 2017

The statute now reads that no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment if it is exchanged solely for real property of like kind. The 2017 amendment to section 1031 substituted 'real property' for 'property' throughout subsection (a), and the transition rule applies the change to exchanges completed after December 31, 2017, unless one side was transferred on or before that date.

Publication 225 states the result plainly: like-kind exchanges beginning after December 31, 2017, are generally limited to exchanges of real property not held for sale, and an exchange of personal property, such as machinery or equipment, does not qualify as a like-kind exchange. The truck-for-truck example still printed in Reg. section 1.1031(a)-1 describes the law before that amendment.

What counts as real property is set by Reg. section 1.1031(a)-3: land, improvements to land that are inherently permanent structures and their structural components, unsevered natural products including growing crops, mines, wells and water rights. Movable machinery is not on that list, which is why the farm sale page separates the equipment, livestock and crops from the acres.

A trade-in is a sale at the allowance, and section 1245 makes most of the gain ordinary

Section 1001(b) defines the amount realized as the money received plus the fair market value of any property received. When the dealer credits $150,000 against a new combine for your old one, you have received $150,000 for the old machine, and the gain is that amount less its adjusted basis.

Section 1245(a)(1) then treats the gain as ordinary income to the extent of the lower of the recomputed basis or the amount realized over adjusted basis, which in practice means the depreciation and section 179 deductions you took. Publication 225 lists farm machinery and trucks as section 1245 property and says to use Part III of Form 4797 to figure the ordinary income portion. A fully depreciated machine makes the entire allowance ordinary income.

Section 1245(b)(4) still caps recapture on a like-kind exchange, but that cap only operates where section 1031 applies, and it no longer applies to equipment. The ordinary income cannot be deferred by buying another machine, only offset by the new machine's deduction.

The new machine's first-year deduction is what replaced the deferral

Section 168(k)(1)(A) now provides an allowance equal to 100% of the adjusted basis of qualified property, which includes property with a recovery period of 20 years or less, and Public Law 119-21 applies that restored rate to property acquired after January 19, 2025. Property bought under a written binding contract signed before that date is not treated as acquired after it, so a tractor ordered in 2024 and delivered in 2025 follows the earlier phase-down rules.

Section 179(b) sets the expensing limit at $2,500,000, reduced dollar for dollar once section 179 property placed in service in the year exceeds $4,000,000, with both amounts indexed for taxable years after 2025. Section 179 property is tangible property acquired by purchase for use in an active trade or business, which covers most farm machinery.

In many years the two wash: the trade-in produces ordinary income and the new machine a larger deduction. A large trade-in with no replacement purchase produces a tax bill the old rules would have postponed.

Worked example: a fully depreciated combine traded in on a $400,000 machine

Hypothetical, round figures; rework them with your CPA and your depreciation schedule. Your combine cost $300,000, has been fully depreciated and is worth $150,000 as a trade-in. The new combine lists at $400,000; you pay $250,000 in cash and the dealer takes the old machine.

The trade-in is a sale for $150,000. Adjusted basis is zero, so the gain is $150,000, all of it ordinary income under section 1245 because it does not exceed the $300,000 of depreciation taken. It goes on Form 4797, Part III.

The new combine's basis is its full $400,000 cost. If it was acquired and placed in service after January 19, 2025, the 100% bonus allowance lets you deduct $400,000 in that year, which more than offsets the $150,000 of recapture, leaving a net deduction of $250,000, the cash you actually paid.

• Old combine: basis $0; trade-in value $150,000; ordinary income $150,000.
• New combine: cost $400,000; first-year deduction up to $400,000 with 100% bonus depreciation.
• Net effect in the year: a $250,000 deduction, but only if the new machine is placed in service that year.

Keep the iron out of the land exchange and sell it on its own schedule

When the farm sells as a going concern, write the equipment price into a separate schedule of the contract and have it paid outside the intermediary; equipment proceeds that pass through the intermediary do not become exchange funds, they only complicate the closing statement. Section 1245 recapture on real estate covers the parallel problem of cost-segregated land improvements inside the exchange.

Timing the equipment sale is a tax decision of its own: a sale in the year you retire may land in a low-income year, or stack on top of the grain sold out of the bin. Ranch families face the same arithmetic with the herd, as the ranch and livestock sellers page explains.

The land side is unchanged. Cropland, pasture, barns and bins go through the exchange into other real estate or into trust interests under Rev. Rul. 2004-86, as the farmland property page and 1031 for farm and ranch families set out. A trust interest cannot be sold on a public market and can lose value, so equipment recapture is never a reason to rush the land into one.