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Transferring Farm Operating Assets at Retirement

By:Robert Moore, Thursday, May 02nd, 2024

Retirement means different things to different farmers.  For some, retirement is the slow, gradual process of turning over the farming operation to the next generation. For others, retirement may be the immediate sale of operating assets when there is not an heir to take over the farming operation.  Regardless of the type of retirement, operating assets will often be transferred.  This article will discuss the different strategies to transfer operating assets and the implications of each strategy.

Strategy #1.  Gifting

The gifting of assets is the simplest transfer strategy.  Gifting works best when the assets are being transferred to a family member and no income is needed from the assets.  While gifting may seem like the obvious best solution if transferring to a family member, there are significant negative tax implications to gifting that should be considered.


  • Simple
  • Ownership is transferred relieving owner of liability and responsibility for repairs and maintenance
  • Helps next generation


  • No income to owner
  • Loss of stepped-up tax basis

Strategy #2. Outright Sale

When income is needed from operating assets, a sale may be the best transfer strategy.  Because many operating assets are untitled, a sale can be completed rather easily.  The buyer provides the funds and the sale is completed.  An outright sale is considered to be a sale that involves all assets being transferred simultaneously with a payment for the entire sale.


  • Creates income
  • Relieves owner of liability and maintenance responsibilities


  • Tax liability is usually significant due to little or no tax basis and depreciation recapture
  • Will use resources of next generation of farmer

Strategy #3.  Gradual Sale

Instead of an outright sale, assets can be sold gradually, over time.  Usually in this strategy, a few items are sold each year until transfer is complete.  The sales can happen somewhat uniformly each year or be adjusted as the seller needs income and/or the buyer has available resources to purchase.


  • May help keep seller in lower income tax brackets by spreading out income
  • Relatively simple


  • Owner must wait to receive income for all assets
  • Owner retains some ownership and thus retains some liability and responsibility for maintenance

Strategy #4. Installment Sale

An installment sale involves the sale of the assets with payment being made over a number of years.  This strategy may seem attractive as a way to sell assets and spread income over time.  However, an installment sale is often the worst strategy when selling operating assets because the IRS requires all depreciation recapture taxes to be paid in the first year of the installment sale.  Be sure to discuss an installment sale with your tax advisor before implementing this strategy.


  • Transfers ownership immediately to eliminate liability and maintenance
  • After the taxes are paid in year 1, little or no taxes may be owed on the remaining payments


  • All depreciation recapture tax is due in the first year of the installment sale
  • Risk of buyer not making payments

Strategy #5. Lease with Purchase Option

A lease allows payments to be spread over the term of the lease with taxes due upon receipt of each payment, rather than all due up front.  The person leasing the machinery can then be given the option to purchase the machinery upon the expiration of the lease.  For the retiring farmer who needs income from their machinery, this is a strategy worth exploring.


  • Spreads income and tax liability over the term of the lease
  • May help cash flow for buyer and lease payments are a deductible expense


  • Ownership is retained so remain liable for the asset
  • The “Buyer” does not own the asset so cannot use as collateral
  • It can be complicated to determine lease rates when machinery is traded, replaced or sold

Strategy #6. Integrating a Business Entity into the Transfer Plan

Using a business entity, such as a limited liability company (LLC) , for the transfer of operating assets can have multiple benefits.  An LLC can reduce liability exposure, simplify the transfer process, and reduce tax liability.  Anyone transferring operating assets should consider incorporating an LLC into the process.


  • Will provide liability protection for the owner of the assets
  • Sale of entity ownership is usually considered a capital gain which is taxed at lower rates


  • Can cost up to several thousand dollars to set up
  • Business entity requires management such as accounting, bank accounts and tax returns

Strategy #7.  Charitable Remainder Trust

A Charitable Remainder Trust (CRT) can be an excellent strategy for the retiring farmer to sell operating assets without immediate tax liability, receive a long-term flow of income and make a charitable contribution.  The strategy involves establishing a charitable trust, transferring operating assets to the trust, then selling the assets through the trust.  Due to the charitable nature of the CRT, no tax is due upon the sale of the assets.  The CRT then establishes an annuity for the retiring farmer which generates annual income.  At the termination of the CRT, the remaining principal in the CRT is donated to the charitable beneficiary.  The CRT strategy is the most complicated strategy and will require the most legal and accounting fees.

For a detailed discussion of the CRT strategy, see the Charitable Remainder Trusts as a Retirement Strategy for Farmers bulletin available at


There are several strategies that can be implemented to transfer operating assets at retirement.  There is no perfect strategy, each one has advantages and disadvantages.  A thorough analysis of the implications to income, taxes, liability and cash flow of each strategy should be performed before deciding on the preferred strategy.  Working with knowledgeable tax and legal counsel can help with the decision-making process and reduce the chances of unwanted or unexpected outcomes.

For more information on these strategies, see the Strategies for Transferring Farm Operating Assets bulletin available at