Blog

by Amanda Smith

“I shall never use profanity except in discussing house rent and taxes.”
-Mark Twain

If Mark Twain were a farmer today, he might change that statement to “cash rent and taxes”, but nonetheless, nothing stirs up profanity at the coffee shop like taxation.  When considering taxation relative to succession and estate planning, two key topics need to be addressed, capital gains tax and estate tax.  Both can influence the portion of your net worth that survives your death. In Part 1 of this series we discussed “fair vs. equal” and this article on taxes might be seen as an extension of that.

Capital Gains & Estate Taxes Giving Uncle Sam less than his “Fair Share” pinch your pennies farming

Selling a farm means giving strong consideration to the potential tax consequences

Although recent changes in the tax law that may influence the propensity with which you reduce income tax through charitable donation, you may choose to benefit charities of choice as an alternative to sharing a larger portion of your estate with Uncle Sam.  We will briefly take a look at implication of capital gains and estate tax.  In Part 2 of this series on Farm Business Structures we’ve outlined several ways to set up the farm for estate planning and these structures may or may not affect capital gains farm taxes. Please remember that this is information only, subject to changes in tax legislation, and should not be a substitute for consulting your estate planning team of professionals.

Capital Gains Tax on Farms

“A person doesn’t know how much he has to be thankful for, until he has to pay taxes on it.”
-Anonymous

Owning property, caring for it well, and leaving it as a legacy for the next generation, might be the greatest source of pride for any farmer, or any American for that matter.  Unfortunately, the greater the appreciated value of property over time, the more you are likely to pay in capital gains tax.  Capital gains is calculated based on the net sale proceeds minus the owner’s basis in a property.  If a property is held beyond a year, capital gains are taxed at a rate of 15% or 20%, in addition to any applicable state taxes.

Reducing capital gains taxes becomes a decision between several options, highlighted below:

Creating a charitable trust provides a lifetime fixed or variable income to the current generation owners. No capital gains are realized when assets like land and equipment are contributed to a charitable “remainder” trust.

At death, a charitable trust to the heirs provides them a lifetime of fixed or variable income. No capital gains are realized, and upon the death of the heirs the assets are distributed to a charitable organization for the purposes desired by the original owners.

In the case of no heirs, where the current owners want to continue to earn income from the operation, and then pass it to a charitable organization at death, property may be deeded to the organization effective upon the owner’s death. This results in a nice income tax deduction for the landowner for the value of the charitable organizations right to own the property, and allows ownership and operation rights for their lifetime.  For the duration of their lifetime they are entitled to all income from the property, and also continue to be responsible for taxes, insurance, maintenance and other operating costs.

In this option, the owner gifts farmland to a charitable organization during their lifetime or at death. No capital or estate taxes would be due with this gift.

If or when the heirs sell the asset, their capital gain realized will be limited to the change in value from the time they inherited the property until the time of sale.

Estate Tax

“A fine is a tax for doing something wrong. A tax is a fine for doing something right.”
-Anonymous

Transferring farm assets from one generation to the next, no matter if it’s during the owner’s lifetime, or upon their death, can be somewhat of a moving target when it comes to tax liability. To better understand how estate tax is defined and calculated, visit this article from Iowa State Extension. (Note: The figures have not been updated to reflect legislative changes in estate tax in 2018) Previous legislation held the limit of transfer without incurring estate tax to $5.49 million, in addition to unlimited transfer to spouses and/or charity.

Current federal legislation, in effect from 2018 through 2025, raised the limits of asset transfer to $11.2 million.  This is in addition to unlimited transfers to spouses and/or charitable organizations.  If you happen to have more than that to be thankful for, or plan to live beyond 2025 or the next Presidential administration change, you will want to pay close attention to legislation changes.

Keeping an accurate balance sheet that reflects current and expected fair market value is key to avoiding estate tax.  Because of the per unit value of not only farmland, but also other farm assets such as equipment, buildings, etc. the value of an estate can approach the $11.2 million per person limit rather quickly.  This is a figure you want to take seriously.  You will want to revisit your estate plan as you acquire assets to make certain you have not reached a threshold which might trigger estate taxes.

“Death and taxes may be inevitable, but they shouldn’t be related.”
-J.C. Watts

In the final article of this series, we will take a look at common mistakes in the estate and succession planning process, and explore a few tools that can be utilized to overcome hurdles when balancing fair and equal regarding heirs.

Agricultural Tillable Acreage

High Quality Soils for high yield corn, soybeans & wheat farming in West Central Indiana.

View Listings

Wooded/Hunting/Fishing/Recreational

Woods, native prairie & upland bird habitat, fishing ponds and the perfect place to build your cabin in the woods.

View Listings

Developmental Land

Prime development land for commercial, retail or subdivision housing developments.

View Listings

Pricing · Offers · Questions

Your message has been sent!
Please correct the highlighted fields.

Blog

Selling the farm is a complex decision. Financial, legal and emotional concerns are a just a few of the important details that surround these large transactions, none of which are to be taken lightly.

After years of strong gains in the price per acre of agricultural farmland, many agree the peak occurred some time around late 2013 and into the spring of 2014. Since this time, the price per acre for agricultural land has seen, for the most part, some softening. Whether you are planning for retirement, have inherited the family farm or are simply looking to cash in on paper profits, there are several ways to sell a farm, including the installment sale. While many people prefer an outright sale with cash at closing, there are some tax benefits associated with installment sales that are certainly worth exploring. The challenging part is finding the right buyer who would finance the deal with a downpayment and contract, but at Geswein Farm & Land Realty, we belive in win-win scenarios.

An installment sale provides some flexibility to spread the capital gains liability out over several years. The end result allows for better tax planning methods and strategies.

The interest earned from a Promissory Note on the farmland installment sale could be higher than the net cash rent income produced by leasing the farmland.

After an installment sale, the only thing the seller has to focus on is collecting monthly interest payment. No longer will you need to manage the farm, renew farm leases, or maintain the property.

When penciling the math with your accountant, the value of a well-performing Promissory Note with interest can be greater the value of the farm real estate, particularly lower quality farmland.

Sellers: Family with several relatives that has inherited the Indiana farmland

Acres: 80 acre farm

Purchase / Sale Price: $750,000

How the Closing Works 

Getting Paid

The closing of an installment is very much a traditional farmland sale. The closing takes place through a reputable Title Company under what is commonly referred to as an “insured closing.” The costs associated with the closing are standard with the Seller and Buyer splitting the “closing costs” evenly.

Down Payment

  • $150,000 paid at closing to the Sellers
  • Promissory Note Original Amount: $600,000

Promissory Note Terms: Interest Rate of 4%. Interest to be paid annually on each anniversary date of the Promissory Note along with a $120,000 principal payment. Promissory note would be paid in full over a 5 year period. Promissory Note would mature in full 5 years from the date of the note.

Prepayment Penalty: 2% during the 5 year term of the Promissory Note, with the provision that with the death of the last spouse, the note could be prepaid in full with no penalty.

Collateral: The Promissory Note would be fully secured with a  1st Security interest in the total acres of the farm (in this example, 80 acres of farmland) being sold/purchased. The original Promissory Note amount would be 80% of the purchase price, giving the Seller(s) their Promissory Note properly secured with a  20% equity/cushion. After the first anniversary principal payment is made, the equity/cusion increses to 36%.

Escrow Agent/Holding of Funds: A very reputable Trust Department of a local, regional, or national bank with an office in Indiana would be utilized to handle the details of the paperwork and transaction. The Seller(s) and Buyer(s) would split the annual fee for the Escrow Agent on a 50/50 basis.

Documentation for Closing:

  1. A Warranty Deed for ownership of the 80 acres would be given from the Seller(s) to Buyer(s)
  2. A 1st Mortgage in favor of the Seller(s) in the amount of $600,000 would be executed by the Buyer(s)
  3. A Release of Mortgage would be executed by the Seller(s)
  4. The $600,000 Promissory Note in favor of the Seller would be executed by Purchaser
  5. An Escrow Agreement would be executed by: The Seller(s); The Buyer(s); and the Escrow Agent. The Escrow Agreement would clearly outline the responsibilities and duties of all parties involved.

 After Closing Details:

Shortly after closing, a reputable title insurance company (e.g. Chicago Title Company), an Owner’s Policy of Title Insurance would be issued in favor of the Buyer(s) for $750,000 and a Lender’s Policy of Title Insurance would be issued in favor of the Seller for the $600,000 Mortgage.

The Promissory Note, the Mortgage, and the Release of Mortgage would remain in the control and possession of the Escrow Agent until the Promissory Note is paid in full. Once the Promissory Note is paid in full, the Escrow Agent would mark the Promissory Note “PAID” and the Escrow Agent would the immediately record the Release of Mortgage at the local County Recorder of Deeds office. Once the documents are properly recorded, then the installment sale of farmland will have been deemed fully satisfied and the responsibilities of the Escrow Agent will end at that time.

How are Annual Payments Made to Seller(s)

The Annual principal and interest payments would be paid from the Buyer(s) to the Escrow Agent. The Escrow Agent would then in turn distribute these payments to the Seller(s). The Seller(s) would be responsible for advising the Escrow Agent of any change in status of the beneficiaries of the Promissory Note and to certify to the Escrow Agent as to whom should receive the annual principal and interest payments going forward and at what address or addresses.

Commission Fees / Broker Fees

It is important to remember that the fees paid to the real estate broker are due and paid in the full at the time of the closing. Regardless of the timing of the installment sale and payments to the seller, the entire commission must be paid at closing. Generally speaking these fees vary based on total number of acres and the size of the real estate transaction.

While this is merely one potential method for selling a farm, it’s certainly not for everyone. Keep in mind that fees paid to the land broker or real estate agent must still be paid in full and are not spread out over the course of the installment sale. More often than not, this technique for selling a farm only comes into play during very limited circumstances.

At Geswein Farm and Land, we believe in creating win-win scenarios for our clients and when necessary, explore alternative options for the sale of a farm.

The information presented here is not to be construed as legal advice. Consult your tax advisor prior to making any decisions for an installment sale of farmland. Geswein Farm & Land Realty, LLC and its agents cannot be held liable on any matters related to an installment sale.

Agricultural Tillable Acreage

High Quality Soils for high yield corn, soybeans & wheat farming in West Central Indiana.

View Listings

Wooded/Hunting/Fishing/Recreational

Woods, native prairie & upland bird habitat, fishing ponds and the perfect place to build your cabin in the woods.

View Listings

Developmental Land

Prime development land for commercial, retail or subdivision housing developments.

View Listings

Pricing · Offers · Questions

Your message has been sent!
Please correct the highlighted fields.

Blog

How the Principles of Timing, Tax-Advantages & Financing Multiply Your Profits

Sometimes referred to as the “donut,” transitional land typically refers to agricultural land or wooded property that is transitioning to a higher and best use such as municipal development, residential development, or commercial / industrial development. The investment into farmland or undeveloped land requires proper due diligence and typically thinking with a long-term strategy. The estimated value and price per acre of farmland or undeveloped land in the transitional market is varied and in today’s market covers a wide range.

Factors Affecting Land Values

Land real estate can increase and shift in value for a variety of reasons. Typically these include a change in zoning, installation or expansion of roads, city utilities and the proximity effect of a new development.

Transition Periods

When land goes from a non-use to a use or from limited-use to a higher and best use, there are increases in value. Owning land in this transitional period is vital to a higher multiplier of profits.

Tax Benefits

There are several tax advantages your investment into transitional land will have. Taking advantage of these benefits is key to real estate investments. Whether you are leveraging your purchase, utilizing a 1031 exchange for capital gains, or considering the variety of deductions to a hedge against inflation – transitional land represents one of the best opportunities for profits when appurtenances that qualify for depreciation are taking into account.

Knowing the Right Buyers

One of the most important factors in realizing higher profits is working with the right buyers at the right time. Whether they are investors, developers, builders, businesses or the end-users of the land, consulting with a land brokerage firm and land advisor with a network of these buyers is another key to success.

Financing Techniques

While every buyer of investment land and transitional land has a unique set of financial circumstances, there are many nuances to financing that factor into greater resale profits. From prepaid interest and interest only financing, savvy transitional land investors are very successful at pyramiding the profits from a land investment into greater and greater profits.

All said, the major emphasis on transitional land investment should be timing. A great first step is to build a relationship with those that are knowledgeable in the local land real estate market. Keep in mind that your land broker regularly works with buyer and sellers who have a successful track record in long-term planning to realize transitional land profits.

Request a FREE Guide to Transitional Land Profits >

Call 765.427.1619

Helping Savvy Investors Realize Maximum Profits

transitional land invesment Investing in Transitional Land Johnny Klemme Geswein Farms for sale

Husband, Father, Author, Land Broker & Advisor

Professional Land Broker & Advisor Johnny Klemme is a Published Author & Purdue Graduate

His reporting, interviews with Land & Real Estate experts, an advisory column and more can be found at www.PrairieFarmland.com/blog

Agricultural Tillable Acreage

High Quality Soils for high yield corn, soybeans & wheat farming in West Central Indiana.

View Listings

Wooded/Hunting/Fishing/Recreational

Woods, native prairie & upland bird habitat, fishing ponds and the perfect place to build your cabin in the woods.

View Listings

Developmental Land

Prime development land for commercial, retail or subdivision housing developments.

View Listings

Pricing · Offers · Questions

Your message has been sent!
Please correct the highlighted fields.

Blog

Opportunity to invest in Indiana farmland is very strong. Today’s market has many similarities to the late 1980’s, where big changes and innovations  in technology, data, and management are combining with market and economic factors of the global ag economy. Historically, by taking the long-view, farmland investments during similar time periods have lead to strong upticks in land values, cash rents, return to land and have been a strong hedge against inflation.

Food production from quality Midwest Indiana farmland has become increasingly significant as worldwide populations grow, climate changes affect production in the Western United States, and new technology or data science gain a strong foothold in agriculture.  As such, great opportunities for investing in Indiana farmland exist today for a chance to take advantage of a period of growth, appreciation and cash flow. Historically, during times of inflation, land investments have increased as much as one and a half times said rate and are considered a vital part of an investment portfolio. This said, investing in Indiana farmland is not for everyone and those that do so understand that informed decisions are more profitable. 

The fundamentals of farmland investments can be boiled down into a few key areas that a professional land broker should be well versed, adept and savvy in. Whether you are investing with cash or doing a 1031 tax deferred exchange, experience and know-how are key to profitability.

Trust, Competence & Specialization in Agricultural Farmland
It has always been said that we do business with people that we know, like and trust. This is especially true for farmland investments. A balanced knowledge of agriculture, business acumen, the local land real estate market, and soils are key to long term profitability – as professional land brokers since 1977, we have the knowledge, experience and know-how to identify the right farms and just as important, how to steer you clear of the wrong farm land investments.

Thorough Farmland Analysis
Seasoned land brokers excel at identifying farms that will provide reasonable cash returns with minimal to zero improvement costs. First time farm land investors greatly benefit from buyer’s representation where experience in the nuances of drainage, tile and soil improvements can make a significant impact on your bottom line and increase cash returns. Understanding historical data sets from prior tenants are increasingly important to savvy investors. When you choose a land broker, their knowledge of locations, soil types, drainage and farm data should be noticeable.

Every Farm is Unique
Not all soils are created alike; therefore it’s important to remember that farms in one area of Indiana can be completely different from farms in other counties. West Central Indiana counties such as Benton, Tippecanoe, Newton, Carroll, White, Warren and Montgomery contain soils that have the highest production value, price per acre and cash rents in the state of Indiana. The prices per acre for farms in these counties have a direct correlation to the production value of the land. Therefore, it is imperative that the land broker representing your purchasing interests be very familiar with area and maintains great relationships with local farmers and landowners.

Commodity Markets, Drainage & Rent to Value
Investing in farm land is a serious endeavor and attention to detail can mean the difference in as much as six figures worth of returns down the road. Investors deserve first class service from a land broker that can deliver on the details. Land brokers worth a darn do more than shuffle paperwork, they have the right tools to do the job, the ability to gather proper information, research and analyze major components of profitability such as soil type, soil drainage and tile systems, as well as cash rent rates, commodity and market expectations – most importantly, a professional land broker can tell you how these factors affect current and future land values.

Farm land investing requires thinking long-term. As you read this article, Indiana farms are being sold at prices that are prime for reasonable annual returns and potential increase in future value (appreciation) and price per acre. Opportunity exists today that may not be here tomorrow as inventory is low and more and more buyers enter the market – purchasing land we list for sale in record time frames. Farm land real estate experts agree that the long term outlook for farm land investments is very strong and the time for investment opportunity is today.

For more information Call or Text 765-427-1619

About the Author

Johnny Klemme Farm Land Broker, Helping investors with buyer's representation  Why Savvy Farmland Investors have Buyer's Representation Johnny Klemme Land Broker Farm Real Estate Indiana

Johnny Klemme is a published author, graduate of Purdue University and Land Broker specializing in farm ground in West Central Indiana. Born and raised on a local farm, his commentary, interviews with Ag experts & reporting on issues important to farming and farmland real estate can be found at www.PrairieFarmland.com/blog

Committed to helping you achieve the highest returns

As the leading experts in farmland and wooded property sales & auctions in Indiana, we provide a complete range of buyer’s representation services for the acquisition and investment opportunity for Indiana Farm land and other agricultural farm investments.

Agricultural Tillable Acreage

High Quality Soils for high yield corn, soybeans & wheat farming in West Central Indiana.

View Listings

Wooded/Hunting/Fishing/Recreational

Woods, native prairie & upland bird habitat, fishing ponds and the perfect place to build your cabin in the woods.

View Listings

Developmental Land

Prime development land for commercial, retail or subdivision housing developments.

View Listings

Pricing · Offers · Questions

Your message has been sent!
Please correct the highlighted fields.

Blog

Many people ask us about the tax saving techniques know as a “tax free exchange”or “1031 exchange”, or “like kind exchange.”

1031 Tax Free Exchange of Farms, Land and Real Estate!  FREE Guide to 1031 Tax Deferred Exchange of Farmland 1031exchange

Get Your FREE Book on Tax Free Exchange of Farms, Land and Real Estate Today!

When selling farmland real estate in Indiana, this is an excellent way to save on capital gains tax, if you qualify. The “1031” comes from the Internal Revenue Code, Section 1031. It  allows a person to defer paying taxes on the gain that may occur when selling real estate, or in our case farms in Indiana.

What questions do you have on 1031 Exchange? This book helps!

For Example: If you sell a farm, for example, for a million dollars and your cost/basis is only $100,000, then you would owe our Uncle Sam taxes on your gain of $900,000. BUT, with proper planning, the establishment of intent to exchange and the advise from your land broker, tax advisor and in some cases an attorney, you can exchange the farm or land by finding another property to buy with that gain. As such, you can “defer” paying the gain tax until you sell the other property.

Get Your FREE Copy of the Book Today! We’ll mail you a copy!

Agricultural Tillable Acreage

High Quality Soils for high yield corn, soybeans & wheat farming in West Central Indiana.

View Listings

Wooded/Hunting/Fishing/Recreational

Woods, native prairie & upland bird habitat, fishing ponds and the perfect place to build your cabin in the woods.

View Listings

Developmental Land

Prime development land for commercial, retail or subdivision housing developments.

View Listings

Pricing · Offers · Questions

Your message has been sent!
Please correct the highlighted fields.

How Can We Help?

Ideas and Advice

I'm looking for ideas or advice.

Start a Conversation
Land for Sale

I'm ready to list my land for sale!

List My Land

Let's Get In Touch.

>
Your message has been sent!
Please correct the highlighted fields.

Let's Get In Touch.

Your message has been sent!
Please correct the highlighted fields.