Mike has covered the topic well. I think he made one error though, fully depreciated equipment is subject to depreciation recapture rules and would be considered "ordinary" income" subject to regular income tax - not capital gains.
A simple example. You have a tractor you paid $10,000 for in 1991. Its fully depreciated so it has a book value of "$0". The bank takes it to cover a $13,000 loan. The tractor sells for $12,000 at auction. The farmer has $10,000 of depreciation recapture also called section 1031 - taxed at 25%. He has a $2,000 capital gain (currently taxed at 10%) and he has a $1000 of dept forgiveness - taxed at regular rates.
You'll be subject to all taxes unless debt is discharged though bankruptcy.
Last word of advice - NEVER USE A LAWYER FOR TAX ADVICE!!!!!! I've seen more estates and bsinesses screwed up because of lawyers then I ever dreamed possible.
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Today's Featured Article - Listening to Your Tractor - by Curtis Von Fange. Years ago there was a TV show about a talking car. Unless you are from another planet, physically or otherwise, I don’t think our internal combustion buddies will talk and tell us their problems. But, on the other hand, there is a secret language that our mechanical companions readily do speak. It is an interesting form of communication that involves all the senses of the listener. In this series we are going to investigate and learn the basic rudimentary skills of understanding this lingo.
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