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NDBaum
Visitor

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?

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4 Replies
Senior Contributor

Re: Equipment Contract for Deed

current min. interest rate allowed by i r s is 4.2%.

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Honored Advisor

Re: Equipment Contract for Deed

You may need a current appraisal and advice on interest rate. These are the two issues that will make it a legally- allowable arrangement. Thoughts also turn towards making sure with counsel how this would work in case of one of you passing. Don't know how significant this amount is to each of you, but since it's taking seven years to pay off, I am guessing it is enough to make you both in the position to miss the money. Your survivors might not want or be able to pay off any balance, but shouldn't lose what you have invested. Perhaps getting some legal counsel is in order. Since you are young, maybe a term life policy to cover the balance, and spelling that out in your will. Maybe he could write a codicil to his will, forgiving any balance you owe if he passed before the loan is paid off, or the loan agreement would spell out how the balance would be settled over time. You will want to have written documents, constructed carefully b an attorney, to protect both of your interests. I don't know how such loans work in families. Laws, especially on inheritances, vary widely from state to state. What seems simple between the two of you in this calm time might be very complicated If someone gets very sick or dies, and everyone's dumbass brother-in-law who has never farmed wants to decide how things will go. I have seen this happen in Mike's extended family. One couple worked for years to turn a wrecked, abandoned farmhouse into a beautiful home, then his sister's husband kept his wife from signing over her share. They had invested a decade and a pile of money into something they would then have had to turn around and pay this jerk for...just because of who he married. They gave up their dream home, and moved out. Poorer but wiser, as they say... Money changes people. I would only do a deal like this with the correct advice from an attorney, in writing and both of you keep a copy. This is a business decision, and should be handled in that manner. Grandpa should be all too happy to have it done that way, too.
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Highlighted
Contributor

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

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Senior Advisor

Re: Equipment Contract for Deed

I wish someone would tell my banker that. He charges me storage.

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