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May 15, 2024

The Farm Tax Guide: Navigating Rising Property Taxes 

As inflation and property taxes increase, farmers need solutions. 

In 2024, farmers are estimated to spend $15 billion on fuel and oil, making it their ninth most expensive input cost. But sitting right above that, in spot number eight, is property taxes—estimated to cost farmers $19 billion—and that number is expected to increase.  

In 2023, there was an average year-over-year property tax increase of more than seven percent nationwide, with some states like Montana seeing a rise as high as 46 percent. In this article, we outline the impact of rising property taxes on agriculture and explain ways rural landowners can reduce their tax burden.  

The Problem: Why Farm Property Taxes Are Rising 

After nearly a decade of negative migration, COVID-19 spurred a major change in 2020. More people were moving to Rural America than moving out. The rise of remote work gave wealthy Americans more choice in where they live—and many of those white-collar workers moved to Rural America, driving up property values.  

The farmland market is historically strong, and home values in agriculture-heavy states are rising rapidly. For example, a typical home in Idaho cost $275,852 in November 2019. In November 2024, the same house is estimated to cost $434,224—a 57 percent increase. 

Property taxes are tied to property values, so as those increase, so too do the taxes. Not only are higher values increasing the cost, but rising inflation is also causing many states to raise their tax rates, making the burden greater.  

The Implications of Rising Property Tax for Rural Landowners 

High land values seem like a good thing, but the downside is that when the value of farmland goes up, the taxes farmers pay on that land also go up. What makes this challenging is that sometimes, just as the prices for farmland start to cool down and farmers’ incomes decrease, that’s exactly when the property taxes shoot up. 

It’s important to note that property taxes don’t necessarily have a steady year over year increase. They have periods where they stay about the same for a while, then suddenly rise. This means farmers might not have to worry about adjusting their budgets for a few years, but then face a series of years where they have to consistently pay more in property taxes. That is why proactive tax planning is so important.  

The Solution: Farm Tax Planning and Farm Tax Exemptions

Many rural landowners use a combination of strategies to reduce their overall tax burden. Below, we’ve listed the most commonly used exemptions and programs for agriculture and what it takes to qualify for them.  

Horticulture Tax Exemption

Despite what many hope, horticulture tax exemption doesn’t usually apply to individual farmers. The exemption, listed under Internal Revenue Code section 501©(5), primarily deals with federal income tax exemptions for agricultural organizations, such as farming cooperatives or labor unions. It doesn’t provide a mechanism for individual farmers to become tax exempt from property taxes on their farmland. 

However, this exemption can help decrease costs for cooperatives and allow a wider profit margin for the farmers who participate in them.  

Homestead Exemption 

Homestead exemptions are offered by some states to homeowners, including farmers, to reduce the property taxes they owe on their primary residences. This exemption typically lowers the assessed value of the home for property tax purposes, resulting in a reduction in property taxes owed on the residence. 

In some states, homestead exemptions may also extend to a portion of the farmer’s agricultural land, particularly if the land immediately surrounds the primary residence. 

Farm Equipment Tax Exemption 

IRS Section 179 allows farmers to deduct the cost of agriculture-related assets like tractors and grain bins from their gross income, reducing federal tax payments. In 2023, farmers could deduct up to $1.16 million from their income.  

Additionally, the Tax Cuts and Jobs Act (TCJA) allows farmers to claim bonus depreciation on the cost of the equipment, allowing them to take a large deduction in the first year rather than spreading it out over several. The increase in expenses results in a reduction in taxable income. 

Soil Testing Deductions

Farmers who have purchased or inherited agricultural land in the past three years are eligible for a tax deduction under IRS Section 180. Under this deduction, farmers can deduct the value of their soil fertility as an input expense on their newly acquired land. AgAmerica offers soil testing services through a trusted provider, where clients saved an average of $12.50 for every dollar they spent.  

Conservation Easements 

Many farmers choose to place some or all of their land under conversation easements, an agreement that limits certain types of development or land use on the property to protect its natural, agricultural, or scenic features. By permanently protecting the land from development, the property’s appraised value for tax purposes may be reduced, leading to lower property taxes. Additionally, the landowner may be eligible for federal income tax deductions based on the appraised value of the easement donation. 

Land Trusts 

A land trust is a nonprofit organization dedicated to conserving and preserving land. Land trusts can help farmers navigate the complex process of donating or selling a conservation easement and accessing available tax benefits and incentives. By partnering with land trusts, farmers can maximize their potential tax savings while contributing to land conservation efforts. 

Succession Planning

Only 23 percent of farmers have a succession plan in place. While many expect their children to inherit the farm after they pass, it is not always guaranteed. Even in situations where children do want to take over the operation, the burden of estate tax forces many to sell the land. Succession planning is a crucial step to ensure the longevity and easy transition of farmland.  

Get Access to Agriculture Tax Experts 

Need help reducing your tax burden? AgAmerica collaborates with tax specialists to enhance your financial strategies, ease tax loads, and manage resources efficiently. With complex agricultural tax laws, navigating them can be tough. Our seasoned team of experts in agricultural finance and tax strategies provide tailored assistance to help you document eligible expenses and maximize your savings. 

Disclaimer: This material has been prepared by AgAmerica for informational purposes only and should not be relied on for tax, legal, or accounting purposes. You should consult your own tax, legal, and accounting advisers prior to filing your tax return.   

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