Reduce Tax Exposure on the Sale of Heavy Equipment

I recently attended a large heavy equipment auction at which thousands of pieces of heavy equipment sold during a one-week period. While observing the auction, it became abundantly clear to me that those who were buying equipment were highly calculated in their decision-making, having done extensive research into the equipment on which they were bidding so that they could make split-second decisions during the auction.

The Heavy Equipment Buyer

During one auction, a buyer who was bidding on a pair of excavators was being challenged in the bidding by an online bidder. The auction proceeded, and the price increased with the buyer frequently checking both the auction book and his notes as the bidding continued. At a certain point, the buyer shook his head, waved his hands, and said that he was out. Though the auction process was over in minutes, it was clear that this buyer had put a great deal of time into the research that enabled him to know exactly when to stop. Such a decision may appear easily made or intuitive in nature. In reality, there may be years of education, experience, fact-finding, and research – all placing the bidder in a position to make good choices during auction.

The Heavy Equipment Seller

One might imagine that sellers of equipment put the same amount of time, effort, and education into the process as buyers. Naturally, an individual or company wants to get maximum value for the machinery they have for sale, but experience and observation shows that less effort goes into the sales side of an auction than the buying side. There are many ways to sell equipment. Some of these include:

  • Directly to a friend or local party
  • Through a website portal (Craigslist, Machinery Trader, etc.)
  • Through an auctioneer
  • As a trade-in to a dealer
  • To a scrapyard

Once the equipment is sold, the owner has a few options:

  • Take the money and cash out
  • Purchase more equipment
  • Reinvest those funds back into the company

With numerous options available to them, it behooves sellers to maximize the value of the equipment they are selling by utilizing sound tax strategies, such as trade-in treatment and dealer pass throughs.

Trade-in Treatment

Most equipment owners understand the benefit of trade-in treatment. Instead of selling equipment to a third party for cash, owners sell the equipment to the dealer who then applies the value toward the purchase price of new equipment. This approach allows a permanent reduction of the sales tax liability related to the replacement equipment.

Trading-in equipment is simple and a great value-add for equipment owners, but how much is the equipment owner truly saving? Remember that trade-in simply reduces sales tax, which ranges between 6.5% and 12.7%. An owner still needs to consider income taxes associated with selling depreciated equipment, which can exceed 40% of the sale price. If you’re putting calculated time and effort into purchasing the equipment, be careful not to overlook tax-saving opportunities when selling it.

Dealer Pass Throughs

Dealers often don’t want trade-in inventory, and owners are frequently unexcited about the price that a dealer has offered for their equipment. In this case, a properly structured dealer pass through can secure trade-in treatment benefits while resolving dealer inventory concerns and addressing the customer’s trade-in value concerns. A dealer pass through can also provide income tax savings when combined with Section 1031 like-kind exchange treatment.

The steps of a dealer pass through typically include:

  • The dealer acquires the equipment from the customer
  • The dealer immediately consigns the equipment at auction
  • The auctioneer sells the equipment
  • The auctioneer relays the sales proceeds to the customer’s qualified intermediary
  • The qualified intermediary relays the sales proceeds to the dealer
  • The dealer takes the proceeds and offsets the cost of the new equipment
  • The customer receives the new equipment and,
    • Receives trade-in treatment
    • Receives like-kind exchange treatment

Conclusion

With a little more time and effort focused on selling strategies, an equipment owner can maximize the value of their equipment. Taking a few extra steps with a dealer pass through that combines trade-in treatment with like-kind exchange could result in thousands of dollars of savings. Learn more about combining section 1031 exchanges with trade-in treatment.