Read expert tips on making the most of the tax benefits associated with your ag land and farmland loans.
In a recent article, we polled the tax experts for tips on making the most of the tax benefits associated with agriculture. Whatever type of agriculture you’re involved in, land is one of your most critical and necessary investments. The question is, are you really doing all you can to make the most of the tax benefits associated with your land in order to help manage your income? Farmers, like all businesspeople, need as many tax breaks as they can get each year to help make ends meet. We looked into some key tax benefits every farmer should consider, and recently spoke to two CPAs for their guidance and perspective. Find more on farmland loans, and the link to the full article for all the advice from the experts, below.
Farmland Loans and Proper Zoning Classification—Big Benefits
“One of the largest tax breaks a farmer can receive on land is the agricultural exemption,” says David Barber, CPA and Senior Underwriter with AgAmerica Lending. “Ensuring that the land is properly classified as ag land can save thousands of dollars per year in property taxes.”
Barber says to keep in mind that state and local tax laws differ so it’s important to seek the advice of your tax professional as you navigate the tax laws in your area.
“Land classification is something that is worth reviewing on at least an every few years basis,” suggests Paul Neiffer, a CPA principal specializing in agribusiness with the firm, Clifton Larson Allen. “I have dealt with farmers who have had to delay selling their farmland due to issues with their title. It’s not a pleasant process and could have been avoided with some upfront review.”
Barber suggests farmers consult with their CPAs or other tax professionals who have experience in your local area or within the industry or commodity in which you operate. These professionals may have knowledge of small nuances in the tax code or local laws to benefit you or your operation.
One of the tax benefits you might not be familiar with is a 1031 Exchange. A 1031 Exchange is a method of selling and buying property such that you avoid capital gains taxes on the property you’re selling.
Ordinarily, when you sell a piece of property, capital gains taxes are assessed on the amount of appreciation that has occurred since you bought the property (the difference in the selling price and the purchase price or the adjusted basis in the property). However, if you use the proceeds from the sale and reinvest them in another, like-kind property, capital gains taxes can be reduced or deferred completely.
A 1031 Exchange can only be utilized for property that is held for productive use in a trade or business, or held for investment purposes. 1031 Exchanges can be complicated because of the definition of “like-kind” and certain timing requirements that must be met.
For additional information about the 1031 Exchange, click here.
“A reverse mortgage can make some sense for retiring farmers in limited situations,” says Neiffer. “It can be a source of ‘income’ for a farmer, but they must realize that it is still a mortgage and has to be paid off if the property sells or is inherited by their heirs. We find that it normally does not make sense for most farmers.”
Barber agrees. “I don’t personally believe that reverse mortgages are the best route to take in most scenarios…the arrangement can be complicated,” he says. “If someone desires to utilize the equity in their property, the best option may be to take out a traditional mortgage or equity farmland loans.”
For additional information about Reverse Mortgages, click here.
Conservation Tax Breaks
“In the right situation, conservation tax breaks through the Conservation Reserve Program (CRP) have great value for farm families that want to keep the land in their family for multiple generations,” says Neiffer. “The primary issue is that the IRS tends to view these as abusive and will likely audit almost any large contribution and if the paperwork is not done correctly the farmer will lose the whole deduction.”
He adds, “Any farmer planning on doing this needs to consult a very competent advisor that specializes in these transactions. We just had a court case come out against two farmers that they could have won with some planning.”
For additional information about the USDA’s Conservation Reserve Program (CRP), click here.
Read the full article here.
As the nation’s premier land lender, AgAmerica Lending supports the investment our nation’s farmers and ranchers are making in agricultural land. Whether you are expanding your existing ranch, buying a farm, or making long-term improvements to your agricultural land, the experts at AgAmerica can custom-build farmland loans to meet the needs of your operation. For more information, contact us to speak with one of our land loan experts today.