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 - Show Coverage: Journey to Ankeny - by Cindy Ladage. We left Illinois on the first day of July and headed north and west for Ankeny, Iowa. Minus two kids, we traveled light with only the youngest in tow. As long as a pool was at the end of our destination she was easy to please unlike the other two who have a multitude of requirements to travel with mom and dad. Amana Colonies served as a respite where we ate a family style lunch that sustained us with more food than could reasonably fit into our ample physiques. The show at Ankeny
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