Don't overlook these benefits of buying farmland

Don't overlook these benefits of buying farmland

Buying farmland can be a great business move for both farmers and investors. Owning agricultural land can open the doors to many excellent tax advantages, business growth strategies and investment returns.

This is not a secret, though. Farmland accounts for more than 80 percent of all U.S. farm assets, according to the 2018 Land Value Survey from Iowa State University. It’s often a farmer’s largest investment item that can also be a significant collateral source and an important part of debt portfolios.

But there are many benefits of owning farmland that are worth discussing. Let’s dig a little deeper with this overview

The land market in Iowa is still stable

According to Iowa State University’s survey, there has been a slight dip in farmland values in Iowa, but overall, the market is still shows stable trends for values. Most respondents expect land values in Iowa to drop slightly looking out one year, but they also expect to see land values increase over the next five years.

The land market is very tight in Iowa, though, with many of the survey’s respondents reporting fewer land sales compared to the previous year. That would suggest any potential buyer can expect some competition when looking at agricultural land that does become available for purchase.

Farmers who own land have many advantages

A farmer who owns the land that he farms has many advantages that tenant farmers may not have. One example is more decision-making control. Buying land gives the farmer more control over the land when making management decisions, including crop rotation, farm practices, conservation strategies, equipment and building improvements and more.

Farmers who buy land can also ensure that they are able to grow their operation and build a stronger business that sets themselves and families up with a more secure future.

Build equity through land purchases

Buying land can help build equity, too, which in turn could lead to an easier borrowing process for existing farmers. Building equity is one of the primary business goals for many farm families. That’s because equity can open the door to many other opportunities, including future income generation, retirement income or the ability to have resources that can be passed on to future generations.

Family farmers can use income that isn’t used for living expenses and income taxes for these investments in additional land. On the other hand, it may be a good idea to use that income to reduce existing debt. To find out what’s best for your situation, speak with an experienced farm management professional to seek advice.

Property tax benefits of owning agricultural land

Investing in farmland comes with several different tax benefits. Eligibility for these benefits often depends on the type of crop that is being produced and how an investment deal is structured.

One example of a common tax benefit is better property tax rates for agricultural land. Each state typically taxes farmland favorably compared to other land, such as residential or commercial. The process of claiming these benefits is different from state to state, though. For the most part, states determine whether a farm is eligible for property tax breaks by looking at its size and income.

Conservation trusts add more tax advantages

Farmers can elect to put some of the land they own into conservation trusts. Conservation trusts seek to preserve natural areas on farmland, ranchland and near water sources. This can also include landmarks or cultural resources that happen to be on the land.

Farmers who put their land in conservation trusts still own the land. Once established, the trust purchases a conservation easement that prevents future developments from occurring on the land. This applies to future owners of the land, too.

Those easements present landowners with tax advantages. If the easement is donated to a land trust and benefits the public, then it could qualify the owner for a charitable tax deduction on their federal income tax return. The easement’s value depends on how much the land is worth, but this could result in considerable tax savings.

Other tax benefits

Owning farmland comes with many other potential tax benefits.

A common example is a tax deduction for depreciation. Many farms have equipment and improvements that depreciate over time. That could include grain storage, irrigation pivots, shops, barns and other buildings or equipment. Some specialty crops, such as fruit or nut trees, can also qualify for a tax depreciation benefit.

In addition, interest paid for a mortgage on farmland can - in most cases - be deducted.

Be sure to contact a tax professional to discuss all the tax benefits that may be at your disposal.

Land investments diversify portfolios

Farmland can be a very attractive investment for those who want to diversify their portfolios and include assets that are not in the stock market. Land, unlike the stock market, often fares better when the market faces volatility.

Farmland also provides generally favorable returns, especially when compared to stocks and bonds. Value appreciation for agricultural land looks strong well into the future, too, as demand likely will continue to remain high.

Investors could see high returns on farmland

For investors, farmland is an increasingly attractive asset thanks to the likelihood of beneficial long-term returns. This is particularly true for land that is in quickly developing or emerging areas that could see infrastructure projects from local governments in future years. If the land is close to an area that is growing quickly, then odds are either those local governments or private developers that they have recruited could inquire about the land.

Before you buy

Before you look to buy farmland, it is always advisable to speak to experts who know the land market. Midwest Land Management can help you align your farming business or land investment strategies with the goals you have set for yourself and your business.

Our team is proud to have 25 years of experience working in the land business. We value building long-term and sustainable relationships with our clients and would be honored to work closely with you to help you meet your goals.

Contact Midwest Land Management today discuss how we can help with your next land purchase.