Equipment Contract for Deed
I am starting to take over my grandfathers operation next spring and am looking for ideas and thoughts on a Contract for Deed on the equipment. We have agreed on a total price and we are thinking 2% interrest over 7 years. Good, bad or indifferent, I am wondering if there are any other details that we are missing?
Re: Equipment Contract for Deed
Re: Equipment Contract for Deed-Facts
The responses to this thread illustrate the need to talk with qualified experts in a number of issues rather than rely on coffee shop talk in a forum.
First, I have no idea where nitefarm came up with his information. The IRS issues interest rates monthly for financial transactions. The December rate for a mid term contract life discussed in this thread is 1.27% for contracts with annual payments. Source: Revenue Ruling 2011-31
Second, everyone here missed the big problem. Yes, the equipment can be sold on a contract. However, under the contract described, grandfather is going to get a big surprise when he goes to file his taxes. All the depreciation taken on the equipment, limited to the amount taken or the sale price of the piece of equipment must be recaptured (reported as income) in the first year of the contract. So, while you have 7 years to pay for the equipment, grandather will be paying all the taxesin year 1 since the equipment is likelly depreciated out.
The solution is to buy specific pieces of equipment over a period of time and rent the other equipment until you are capable of purchasing the other items. Be cautious with your contract. If you create a contract that looks like an installment contract, you still have the problem I described earlier. "If it looks like a dog and smells like a dog, its; likely a dog"!
Get with your grandfathers tax preparer and then decide course of action.
Farm and Ranch Tax Letter
115 East Twyman Street
Bushnell, Illinois 61422