Are you considering making a transition from active land ownership to passive land ownership, in the form of renting out your land? Where do you start?
One of the best places to start is by meeting with a Professional Farm Land Manager.
Farm Land Managers offer professional management services to farmland owners to help them optimize the returns from their asset. Using their expertise in working with people, crop and livestock production, commodity marketing, soil conservation, financial analysis and accounting, farm managers help their clients maintain and improve the value of their asset and generate cash returns that meet their client’s objectives.
Land Managers will personally visit the land, analyze, and document current conditions, visit with the tenant, and provide an annual report for the landowner(s) at the end of each year. Transparency between landowner, tenant and the Land Managers are the goals of this partnership as well as building long-term relationships for continuity in performance.
Are you considering selling your land and heading south to warmer climates for the winter months? How do you go about finding a reputable company to help you through this process? Below are a couple suggestions to get you started.
– Find a company who has experience in Agricultural real estate. Selling houses is not the same as selling farmland or ranchland. You’ll want someone who understands the various factors that can affect land value, such as soil productivity, access, commodity prices, condition of fencing and water supply for cattle.
– Look for a company that has a broad reach with their marketing coverage. As land values have leveled off and began declining in some areas, the return on investment is starting to tick back up into a range that is attractive to investors. The goal is to attract as many interested buyers as possible in order to get the best price for you. That is best accomplished by more than an ad in the local paper. Ask the company how many prospective buyers they have in their database.
– Choose someone you can trust. This one is harder to measure. It often comes as a feeling you get when meeting with them in person. Do they tell you the truth or do they just tell you what you want to hear in order to get your business? Are they straight shooters, do they have a good reputation, and do you feel like you can trust him/her?
Capital Gains Taxes
If you are considering selling your land at some point down the road, there are things you will want to understand to make it a less stressful process. One item is Capital Gains Taxes. The good thing about owning land as an asset class is it has a solid track record of increasing in value over time, typically pays dividends, and rarely goes away. The flip side of an appreciating asset is that Uncle Sam says you may be liable for a percent of that increase in value in the form of Capital Gains Tax.
Let’s take a simple example. Say you bought 160 acres of land for $200/acre, you sell it for $1000/acre and your adjusted gross income (AGI) puts your capital gains tax rate up to the 15% bracket. How much capital gains tax might you owe?
Step 1: Determine your basis. Your basis is the value of the land at the time of purchase. In this case, $200/acre.
Step 2: Calculate the difference between Selling Price and Basis. In this example, $1000/acre minus $200/acre = $800/acre.
Step 3: Calculate the amount of possible tax owed. $800/acre x 160 acres = $128,000 x 15% tax rate = $19,200.
In this example, you may find yourself writing a check somewhere in the neighborhood of $20,000 to Uncle Sam. Ouch, right? What other options do I have?
Before continuing, I must first provide a disclaimer that I am not a tax expert and you should visit with your professional advisors such as an accountant, attorney or financial planner, for more details on the best options for your situation. The intent here is to provide enough information so that you can have those conversations with your respective professional experts when the time comes.
Are there options to defer or minimize the amount of capital gains taxes I have to pay? Yes, there are. 1031 exchanges are one such option. This involves trading like-kind property for like-kind property. Like-kind meaning income producing property for other income producing property. This could be selling your farm in SD and buying a ranch in MT, or buying an apartment complex in Fargo. Doesn’t have to be ag land for ag land, but it must be a form of income producing real estate. The key with a 1031 exchange is that the proceeds from the sale of your land NEVER touch your hands and instead are handled through a 3rd party intermediary. There are also limited amounts of time that you have to identify and then close on the new property that you’ll want to be aware of when you head down this path.
One other option worth mentioning is the use of a 1031 exchange and then a subsequent 721 exchange in conjunction with a REIT (Real Estate Investment Trust). With this type of tax deferral transaction, you transition from active ownership of the land into passive ownership of units in a REIT. There are various REITs that one can invest in. One such REIT that our company often works with involves ownership in memory care, independent care, assisted living care facilities and multi-family properties, some of which are located throughout the state of North Dakota and surrounding areas. This REIT has been generating a competitive income and growth return for its unit and shareholders over the last seven years.
Our company has a resource that is willing to work with your tax planners to help understand the various options to help determine which makes the most sense for you. This is a niche area of the federal and state tax code and additional expertise can be helpful and is usually needed.