Farm Horizons
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Oct. 10, 2016
have been received if the land was sold.
If there were two children in this scenario, child one
received 80 acres as a gift, and child two received 80
acres as an inheritance, who comes out better?
If both are farming the land, it doesn’t matter. If both
decide to sell, it makes a huge difference. One will pay
capital gains, because of the low cost basis. One will not
pay capital gains because of the stepped-up basis, because it was transferred through the estate.
Should you sell inherited land or not?
It will come down to a personal decision, and will
probably be heavily influenced by your financial position
at the time. You have just received an income stream for
the rest of your life, and possibly your children’s lives.
If we use the same 80 acres from above, that is $16,000
after the Real Estate taxes have been paid. That is like
having a part-time job without having to put in any hours
at work. If we assume that you will live for another 40
years, that is $640,000 of income, compared to $400,000
if it was sold.
By renting the property, you just received income for
an extra 15 years (400,000 divided by 16,000 equals 25
years). Which would you rather have? Cash now, or income for the rest of your life; and still have 80 acres of
land to pass on to your children for them to have an income stream?
If you are willing to develop a relationship with your
renter, and value the extra things that the renter will do
with this piece of property, like mowing the ditches, repairing the tile lines, maintaining or improving fertility
and soil tilth, managing the property for FSA programs,
and being good stewards for soil conservation, you can be
reasonably assured of a lifetime income stream.
If you are not interested in a relationship with your
renter and choose to receive the highest rental bid each
year, then I will assure you that those things will not be
done.
Fertility will probably be bare bones, in order for the
renter to reduce expenses to make any return on that
farm.
I have seen a couple of farms that have switched renters, and now have a huge gully through the farm because
no soil conservation was practiced. This will be a large
expense for the owner, or some future renter to correct.
I would urge all landowners to have this discussion with
your renter – how will they take care of your property?
Will they maintain fertility? Will they use soil conservation practices? Will they try to improve the property?
Will they maintain weed control, both in the field and in
the ditches, building site, and any non-tillable areas? Will
they give a report once or twice a year?
I would urge all renters to have this discussion with
your landlords. What do you bring to the table when it
comes to managing their land? What will happen to the
land when the current owner dies? Do you, as the renter,
know the children? Have you ever met them? Managing
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rental land is very much based on personal relationships.
In some ways, the landlord is like an employee to your
business. How do you treat your employees? How do you
treat your landlords?
To summarize this whole article, I would start with
the personal relationships. How well do you know your
landlord’s family? The landowner’s family should have a
discussion about what happens to the land. Will the kids
keep it, or will they sell the land? What are the consequences?
Agriculture is a capital intensive business and very few
farmers can afford to borrow enough money to own every acre that they farm, so we need the rental land. Every
farm needs enough land to operate efficiently with the
machinery that they have.
If all of the rental land went on the market, I would
guess that the majority of the land would be owned by
large investment firms because the current active farmers
could not access enough capital to purchase all of it.
I would also guess that if this were to happen, the land
values would fall dramatically becaus