Farmland Investing Taxes And Deductions Explained 2023

Key Points

• Farmland is a stable investment that retains value and can even outpace the stock market.
• To ensure maximum tax savings, it is crucial to understand the tax implications of investing in farmland and potential deductions.
• Farmers can take advantage of tax benefits provided by the government through a land conservation trust.
• Farmland investing has other tax benefits, such as sales or property tax exemptions, depreciation, and various deductions.
• Farmland qualifies for a 1031 exchange and can be invested through an individual retirement account.
• Always consult with a tax professional about your own unique tax situation, as we are not tax or investment professionals.

For decades, farmland has proven itself to be an intelligent investment. Historically, it does not lose value and has even outpaced the stock market.

However, before investing in any new asset class, it is essential to understand how the investment will be taxed and potential deductions to help save your tax bill.

This article reviews a few key deductions and tax-saving strategies with farmland investments.

With the great need to preserve farmland to protect the food supply, the government provides an attractive offering to farmers to put their land in a conservation trust. We'll cover that first and then review other key farmland tax deductions.

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Conserving Farmland Through Trusts

According to the USDA, there are acres of farmland or 2.1 million farms and ranches across the nearly 920 million countries.

However, this represents a steep drop from its peak in the 1930s, when there were more than 7 million farms.

Helping preserve this land's future is vital to protect the food supply. Involvement in preserving this land comes with a few key tax benefits.

What Is A Land Conservation Trust?

Since the late 1800s, land trusts, also called conservation trusts, have been used to protect natural areas and productive land such as farms.

These days, farmland investors frequently put a portion or all of their land in conservation trusts through this type of easement.

These trusts provide tax benefits to farmland owners who preserve their land and protect its future.

Conservation easements offer unique tax advantages for investors. These easements are given to farmland investors because everyone in the community will benefit from permanently protecting natural resources.

Thus, certain portions of farmland investments can qualify as a charitable tax deduction on federal income tax returns.

Could you check with your tax professional to determine what percentage of the value of the farmland qualifies as itemized deductions? In some cases, you will be allowed an immense belief in the first year you buy and establish a conservation trust than in subsequent years.

Other Farmland Tax Benefits

Outside of setting up a land conservation trust, several other potential tax benefits are associated with farmland investing.

1. Sales Or Property Tax Exemptions

States provide various farm tax benefits, most commonly exemptions from sales, use, or property taxes.

A state may allow farms to avoid paying such taxes in the first place or issue a credit for taxes paid after farms have filed their returns each year.

2. Depreciation

Depreciation is the decline in the value of assets over their estimated useful lives.

Unfortunately, you can't deduct the overall cost of farmland because land does not wear out, become obsolete, or get used up.

Unlike property, farm buildings can be written off over  10 or 20 years, depending on their use. Likewise, land improvements such as drainage systems and soil enhancements can be depreciated over 15 years.

If you make capital improvements on the land, such as buildings, livestock pens, or other necessary farm equipment, depreciation expenses on these items can be deducted from your gross income.

Most farm equipment will have a five-year life for tax purposes.  This is just a general rule, and there are exceptions. For example, some farm assets, such as fences around the farm property or storage bins for grain, have seven-year lives regarding depreciation.

3. Deductions

Farmers may generally deduct the cost of materials and supplies in the year they are purchased. This would include removing the cost of fuel, tools, fertilizer, and feed.

Farmers can also deduct most expenses associated with repairing and maintaining the physical structures on the farm property. This would include deducting expenses for work such as improving the roof of a farm building or putting up a new fence.

Bonus depreciation provisions are also available, offering specific deductions based on national directives at different times. If available to you or your operator, have them check out what bonus depreciation provisions are general each year.

The cost of seeds and plants used to produce a crop for sale are also typical deductions.

Depending on how you invest in farmland, deep itemization and listed deductions from taxes may not be available to leverage directly.

Usually, these kinds of deductions are filed by owner-operators who own the land directly or by the firm that controls the land for their investors.

Suppose you're investing through a more passive role, like a REIT. In that case, you may have various voting rights for specific instances, but most actively managed farmland investing platforms have this taken care of by paid professionals already.

4. 1031 Exchange

Farmland, like other real estate, qualifies for 1031 exchanges.

This allows you to defer capital gains tax by rolling the profits of one real estate investment into a like-kind investment.

For example, let's say you purchased a piece of farmland for $100,000 and sold it ten years later for $150,000. You would have $50,000 of capital gains to pay taxes on.

If you wanted to defer and pay those taxes later, you could purchase another piece of farmland for $150,000. If you complete the exchange within the IRS timeline, you can say “catch you later” to the IRS when paying capital gains taxes.

5. Individual Retirement Accounts

Another tax benefit is taking advantage of investing in farmland through an IRA. This would apply to investing in a farmland REIT or online farmland investment.

Not all assets can be owned in a retirement account, but real estate is allowed. An IRA is an investment account enabling you to invest with certain tax advantages. The two most common ones are the Traditional and Roth IRA.

With a Traditional IRA, you avoid taxes now but pay them later.

With a Roth IRA, you pay taxes now but avoid them later.

Individual IRAs give investors a lot more flexibility regarding what they are investing in. You are not solely limited to mutual funds or other funds like you are with most 401(k) plans.

Some crowdfunding farmland platforms, such as Harvest Returns, allow you to invest through an IRA to reap these benefits.

Farmland Investing Taxes: Conclusion

Similar to other businesses, running a farm or owning farmland and renting it out is complex and involves many moving parts.

However, unlike many business endeavors, farming has an irreplaceable impact on the world.

Protecting these properties is an enormous necessity, and farmers who establish conservation easements can earn tax benefits.

Other write-offs for depreciation on farming equipment, improvements on the site to physical structures, and the annual costs of seeds and fertilizers are also imperative for farmers to stay in business.

The more farmland owners can cultivate their land towards ensured long-term food production, the more they will find available tax benefits.

Depending on how actively or passively one chooses to invest their time and resources into their farmland asset, they will have more control over their tax options.