The Retirement Auction

Updated August 3, 2026. Quick answer: the machinery sale is taxed worse than almost anyone expects, and the reason is that every depreciation deduction taken over thirty years gets settled up in one afternoon. Gain on depreciated equipment is ordinary income to the extent of the depreciation taken — not capital gain — and it all lands in a single tax year.

Why the number is so large

Except as otherwise provided in this section, if section 1245 property is disposed of the amount by which the lower of- (A) the recomputed basis of the property, or (B)(i) in the case of a sale, exchange, or involuntary conversion, the amount realized, or (ii) in the case of any other disposition, the fair market value of such property, exceeds the adjusted basis of such property shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.

— 26 U.S.C. §1245(a)(1)

The mechanism is simple once stated. A tractor bought for $180,000 (2010) and depreciated to a basis of zero, sold at the sale for $60,000, produces $60,000 of gain — and because the depreciation taken exceeds that, the whole $60,000 is ordinary income. Not capital gain. Twenty items behave the same way on the same day.

The three things that stack

• The rate. Ordinary rates, not long-term capital gain rates.
• The bracket. A whole career of equipment settling in one year can push a farmer into the highest bracket they have ever been in, in the year they stopped earning.
• The knock-ons. A single large income year can raise the Medicare premium surcharge two years later, and can change how much of the Social Security benefit is taxable that year.

Grain and livestock are a separate item

Raised grain in the bin and raised livestock generally have no basis at all, because the cost of raising them was already deducted. Selling them at the same sale adds gross income on top of the equipment recapture. Families often think of the sale as one event; the tax treats it as several.

What actually helps

Almost every real remedy is a timing remedy, which means it has to be arranged before the auctioneer is booked:

• Split the sale across tax years, by selling different items in different years. Two smaller years can cost materially less than one large one, and this is the remedy with the most leverage. Note carefully what it does not mean: selling everything at once on an installment note does not spread the recapture. Recapture income is recognised in the year of disposition no matter when the payments arrive, so a seller-financed sale bill can produce a tax bill far larger than the cash taken in that year. Why recapture lands in year one.
• Sell grain in the following year where storage allows, rather than stacking it onto the equipment year.
• Look at the deductions available in the same year — a retirement plan contribution for a self-employed farmer is sized off earned income, and an unusually high income year is the year it is largest.

What does not help is assuming the land sale and the machinery sale are the same kind of event. Land held for years is generally capital gain; the equipment is not, and the equipment is where the surprise lives.

Honest gaps

Whether a particular item is section 1245 property or falls under the separate rules for buildings and land improvements depends on the item, and grain-bin and tile treatment in particular is worth checking rather than assuming. We have stated the recapture rule from the statute; the allocation across a sale bill is an accounting exercise done with the actual depreciation schedule.

Related: passing down the farm and gift versus inherit.

General information drawn from the Internal Revenue Code, Treasury regulations, IRS publications and the relevant state statutes, not legal or tax advice. Dollar figures are adjusted regularly and the state-law half differs from state to state, so check the current year and your own state before you act on a number.