Leasing out a farm building can be a fantastic way to generate extra income. Maybe you’ve got a barn, a shed, or a specialized storage facility that’s not getting much use.
Instead of letting it sit empty, leasing it to another farmer can put cash in your pocket.
But what about taxes? For many farmers and landowners, the tax implications of these agreements can feel a bit murky. The good news is that with a little knowledge, you can navigate this area confidently.
We’re going to walk through understanding the tax benefits of leasing farm buildings.
Find out how you can navigate this topic more confidently today so you can get one step closer to running a more profitable operation.
Understanding Lease Agreements
First, let’s clarify what we’re talking about. For tax purposes, a “farm building” is generally any structure used in a farming business.
This could be anything from a simple hay shed to a more complex dairy barn or grain silo. The primary use must be for agricultural purposes.
When you lease one of these buildings, the agreement you sign matters. Leases typically fall into two categories, and the IRS views them differently.
Operating vs. Capital Leases
An operating lease is the most common type.
Think of it like a straightforward rental. The landlord (lessor) owns the building, and the tenant (lessee) pays to use it for a set period. At the end of the lease, the building still belongs to the landlord.
A capital lease, also known as a finance lease, is more like a purchase agreement.
The terms give the tenant ownership-like benefits. For example, the lease might last for most of the building’s useful life, or the tenant might have the option to buy it for a bargain price at the end.
The IRS might treat a capital lease as a sale, which changes the tax rules significantly. For this post, we’re focusing on operating leases, which are much more common in farming.
Why Clearly Defined Lease Terms Matter
No matter what, your lease agreement should be crystal clear. It needs to spell out the rent amount, payment schedule, and who’s responsible for what.
Who pays for insurance? Who handles repairs and maintenance? Having this all in writing avoids confusion and gives both parties the documentation they need for their taxes.
Tax Benefits for Landlords (Lessors)
If you’re the one leasing out your building, you have several opportunities to lower your tax bill. Let’s break them down.
Depreciation Deductions
As the owner of the building, you can claim depreciation deductions. Depreciation allows you to recover the cost of your building over time as it wears out.
Farm buildings generally have a 20-year recovery period under the General Depreciation System (GDS), but you might be able to use a shorter period in some cases.
For example, a new machine shed might be depreciated over 20 years. Each year, you can deduct a portion of its value from your taxable income, which is a significant saving.
Deducting Operating Expenses
Any money you spend to maintain the leased building is usually a deductible business expense. Did you have to fix a leaky roof or replace a broken door? If so, consult your tax expert, because there’s a good chance you can deduct those repair costs.
Other deductible operating expenses will typically include:
- Property insurance premiums
- Real estate taxes on the building
- Utilities (if you pay them)
- General maintenance and upkeep costs
These deductions reduce your net rental income, which means you pay less in taxes.
Handling Rental Income
The rent you receive is, of course, taxable income. You’ll report it on your tax return, usually on Schedule E (for supplemental income) or Schedule F (if it’s tied to your broader farm business). By subtracting your expenses—like depreciation, repairs, and insurance—from your rental income, you only pay tax on the profit.
Tax Benefits for Tenants (Lessees)
What if you’re the farmer paying to use someone else’s building? You get some valuable tax perks, too.
Rent is a Deductible Expense
This is the biggest benefit for tenants. The rent you pay to use the farm building is considered an ordinary and necessary business expense. That means you can deduct the full amount of your rent payments from your farm income.
So, if you pay $10,000 a year to lease a barn, you can reduce your taxable farm income by $10,000. This is a direct and simple way to lower your tax liability.
Avoiding Capitalization
By leasing a building instead of buying it, you avoid the large upfront cost and the complexities of capitalizing a major asset on your books. Instead of a massive initial outlay, you have predictable, deductible rent payments. This can free up cash for other parts of your business, like buying new equipment or livestock.
Key Considerations and Planning
You can find commercial real estate in Iowa right now, so knowing how to prepare your tax strategy immediately is critical. To make the most of these tax benefits, you need to organization and a proactive mindset.
The Importance of Proper Record-Keeping
Good records are your best friend at tax time. For landlords, this means keeping track of all rental income and every expense related to the building, from insurance bills to receipts for repairs.
Tenants should have copies of the lease agreement and proof of all rent payments. If you make any leasehold improvements, keep detailed records of those costs as well.
Digital tools and spreadsheets can make this much easier than stuffing receipts into a shoebox.
Consult with a Tax Professional
Tax laws can be tricky, and every farm’s situation is unique. It’s always a good idea to work with a tax advisor who specializes in agriculture.
They can help you structure your lease agreement correctly, ensure you’re taking all the deductions you’re entitled to, and avoid costly mistakes. A professional can provide guidance tailored to your specific circumstances.
Staying Updated on Tax Law Changes
Tax laws aren’t set in stone. They can and do change. Staying informed about any updates that might affect farm leases or depreciation rules is part of being a smart business owner.
Your tax professional can help with this, but it’s also helpful to pay attention to agricultural news and publications.
Maximize Your Tax Advantages
Leasing farm buildings offers a smart financial strategy for both landlords and tenants.
Landlords can turn an underused asset into a steady income stream while taking advantage of deductions for depreciation and operating costs. Tenants get access to the facilities they need without a huge capital investment and can deduct their rent as a business expense.
The key to it all is a well-structured lease and meticulous record-keeping.
By understanding the tax benefits of leasing farm buildings and working with a knowledgeable professional, you can make sure you’re not leaving any money on the table. A little planning goes a long way in strengthening your farm’s financial health.
Consult a tax expert today to get one step closer to a solid strategy for your farming business.