Quick answer: Depreciation lets you deduct the cost of farm assets over their IRS-defined useful life rather than all at once. Farm equipment (tractors, combines) depreciates over 5–7 years. Farm buildings depreciate over 20 years. Land itself never depreciates. Each year's depreciation deduction reduces taxable income without a cash outlay — until you sell the asset and face depreciation recapture.
MACRS Depreciation Schedules for Farm Property
The Modified Accelerated Cost Recovery System (MACRS) governs most farm asset depreciation. Key schedules:
- 3-year property: Race horses, some breeding hogs — uncommon
- 5-year property: Automobiles, light trucks, computers, certain breeding cattle and horses
- 7-year property: Most farm equipment — tractors, combines, tillage, irrigation equipment, grain handling
- 10-year property: Single-purpose agricultural or horticultural structures placed in service after 2017
- 15-year property: Land improvements — fencing, roads, drainage, terraces
- 20-year property: Farm buildings (barns, shops, equipment buildings) placed in service after 2017
- Not depreciable: Land, inventory (livestock held for sale, standing crops)
MACRS uses a double-declining balance method for most personal property and straight-line for buildings. The half-year convention applies to most equipment in the year it's placed in service.
Bonus Depreciation and Section 179
Beyond standard MACRS, two accelerated deduction rules can dramatically speed up write-offs. Section 179 allows immediate expensing of up to $1.22M (2024) in qualifying equipment in the year purchased. Bonus depreciation (60% in 2024, phasing down from 100%) allows additional immediate deductions on most new and used equipment after Section 179. Using these provisions in a high-income year — a record crop year, a land sale year — can significantly reduce the current tax bill. In low-income years, standard MACRS may be preferable to conserve deductions for when they're more valuable.
Depreciation Recapture: The Hidden Tax at Sale
Depreciation reduces your asset's tax basis. When you sell that asset, the gain includes all the depreciation you deducted — and that portion is taxed as ordinary income (Section 1245 recapture) at rates up to 37%, not at favorable capital gains rates. For example: a $250,000 combine purchased in 2019, fully depreciated to zero by 2024, sold for $120,000 — creates $120,000 of ordinary income recapture. This surprises many farmers who expect a "low-gain" sale. Recapture cannot be deferred by a 1031 exchange or installment sale (recapture must be recognized in the year of sale). Factor depreciation recapture into every equipment and farm sale calculation well in advance.
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Kyle Ellison is a fourth-generation Texas Panhandle rancher and licensed financial professional in TX, CA, NV, MT, UT, NM.