The government retains certain rights no matter who is on the deed. In fact, if you look back at an abstract far enough, most of original conveyances came from the United States government via a “patent.”. This document, in Iowa is generally for 40-acre sections signed by Franklin Pierce. In the end, the uncomfortable truth that we don’t always contemplate is that our rights of property ownership are derived from and there for are controlled by, the government. Of course, the government is supposed to be by the people so we are really granting ourselves rights. right??
Here is a look at some of the government powers.
Police Power: Zoning ordinances and building codes that promote the health, safety, or the general welfare of the public. Zoning can be easily defined as the government’s ability to enact regulations to reasonably control land use. It could be an ordinance requiring mowing of grass; in the country it might be soil conservation rules requiring owner to terrace property; statute authorizing destruction of diseased cattle without compensation; ordinance prohibiting ownership of dangerous/vicious animals. Sometimes zoning can’t be enforced so you need to get a variance from a board of adjustment. In Iowa, what was once an easy process is now being tightly construed that in order to get a variance, no other economic value can occur. For example, construction of a pergola less than 30 feet from the curve is something that has been routinely allowed by a board of adjustment, but under Iowa supreme court rulings, not having a pergola isn’t depriving a landowner of all economic use and is therefore not a hardship, so the variance should not be granted. The impact on the surrounding properties also considered. Note, zoning on ag land is pretty limited but the county can stop using the ag designation as a shield to get around rules against subdividing ground int buildable lots in the county for residential use.
Eminent Domain: Eminent Domain provided for in 5th Amendment to the Federal Constitution. It prohibits the government from taking private property for use without just compensation for the owner. The eminent domain clause is also known as a taking’s clause. An explicit taking is the classic example is if a landowner will not voluntarily sell property to the state to build a highway, so the state uses its eminent domain powers to obtain the property and provide the owner with “just compensation.” An implicit taking occurs when the government regulation indirectly causes a result that has the same effect as an explicit taking. An example would be if an owner bought land to develop it, but then shortly later, the government banned new development in that area. The resulting process from eminent domain power is called condemnation.
Taxation: Taxation can affect real estate in two ways the taxes that are assessed against the real estate or other taxes (i.e. income tax, sales tax) that becomes a lien on the property due to the owners’ debt. When real estate taxes remain unpaid, the property can be sold at tax sale.
Escheat: This is the process by which property reverts back to the state (or county) in cases where an owner dies without heirs and without a will or where the property is abandoned. Since the government granted the rights in the first place, they built in a feature to allow them to reclaim the rights granted if nobody else can claim them.
Statutory Interests in Property
Yes, dirt is what is behind your ear and soil is what we grow crops upon. The alliteration of soil is special is catchy but not quite as catchy as dirt is different. We treat landownership and its disposition in estate plans differently than we do cash, the family shoe factory or even the family dog. Understanding how property works is an essential knowledge component for the landowner, the potential heirs or the prospective new buyers. Every state’s property system is different, and this will focus on Iowa’s.
Property ownership is often described as a “bundle of sticks”. I grab a wad of pens to demonstrate each stick. Each of these “sticks” represents an individual right. Sometimes an owner might have the entire bundle of sticks. The occupant usually has most of the sticks. Sometimes, a life tenant might have another one, a mortgage company might have another one, the REC might have one for a power easement, or the city might have another stick due to zoning requirements. Yep, the government retains some rights, like police power, eminent domain, taxation, and reclamation of “dead” properties (when nobody else can claim it, the government makes sure it can).
To keep track of the rights, in Iowa we utilize an abstract & title opinion system. Most of the states and international holdings use a system developed by an Englishmen in Australia, the Torrens system and it is coupled with a title insurance requirement. An abstract of title (a/k/a abstract) is prepared which summarizes any recorded or filed instruments affecting title like mortgages and judgments. It is a history of the property. An abstract can only provide information about recorded instruments as they are shown on their face. Some problems are not revealed from an abstract (i.e., forged signature, seller was incompetent, etc.).
An attorney reviews the abstract and issues a title opinion that states the legal descriptions, the titleholder(s) and any objections (which may be defects to be corrected such as tax liens or may be issues of notice such as presumably acceptable utility easements). It is like a book report on the history. Unlike a title insurance system where defects are routinely insured over, Iowa’s system requires that any defects must be resolved before closing can occur. It is illegal to sell title insurance in Iowa, so the state has a title insurance equivalent (that is far cheaper) to make sure Iowans can get nationally marketed mortgage products.
In Iowa, the government is preparing to fix some problems with matching federal depreciation rules, with taxing of grants that the federal government did not tax as part of Covid relief, and some new rules on PPP loan and Beginning Farmer Tax Credit. Additionally, inheritance tax (tax Iowa imposes on people that inherit property from people that they are not direct descendants) is on its way out the door through a phase out between now and 2025. That is a tax on circumstance, as many times nephews and nieces are the next generation of farm owners and this will remove a financial obstacle for nontraditional farm generational transfers. If you are in line to get Great Aunt Gertie’s 160, feed her vitamins for a couple of more years, it’s worth the investment.
On the fed side, the president is laying out his tax and spending priorities. He has already pushed through a Covid 19 Plan called the American Rescue plan and is now moving towards a significant tax hike to fund physical infrastructure spending (the American Jobs Plan and “human infrastructure” (American Families plan). It might be called the make American Taxed Again plan. A great write up of this is found at the Iowa State Center for Ag Law and Taxation. I will hit the highlights. Note this is separate from the Senator Bernie Sanders introduced 99.5 Percent Act. This proposal would lower the basic exclusion to $3.5 million ($1 million for lifetime gifts) and increase the highest estate tax rate from 40 percent to 65 percent.
The Jobs plan looks to increase corporate tax to 28% (from 21%), imposing tax on corporation book income and funding the IRS to beat the countryside for unpaid taxes or reinterpreted tax returns to generate revenue.
The Families plan calls for 2 years of free community college, free universal preschool (which is reported at 4 years of free education occasionally), universal basic income for parents of children, paid FMLA and additional targeted funds to historically black colleges universities, minority serving institutions and tribal colleges (that is higher education sites that where historically operated to serve minorities), increase Pell Grants, money for teachers. The Plan will pay for these largess distributions by “closing loopholes”, increasing IRS audits and crackdowns and changing how long-term assets are taxed. It would increase capital gains rates (which are currently lower than regular income rates) on those who earn over $1,000,000 (to include the sale of the property in that earning), increase taxes on all income over $400,000, increase the individual rates to the 2017 rates, and tax assets at death as if they were sold, regardless of if the asset is actually sold or not.
Some of the things being considered include the elimination or reduction of the 1031 exchange provision that defer capital gains when selling real estate if you buy another piece of real estate, limiting the use of Net operating loss and making some sort of deferral exemption for “family farms” from the pay at death provisions, and increasing funding for everyone’s favorite government agency, the IRS.
Right now, you pay a tax upon the sale of assets that gain in value if you sell them. This is capital gains. If you hold them for more than 1 year it is a lower rate than if you hold them for less than 1 year. Also, you pay a net investment income tax (NIIT) sales of investment assets at 3.8% if your income is above a certain threshold. The difference between current law and the proposal on the sale of 1000 acre Iowa farm that with $6,525 of gain per acre would be an percent increase of the sales price from 17.6% to 36% of the total sales price. If the owners were not active farmers and had rented the farm out for 10 years, then they would be looking at 43.8% of the sales price going to taxes between state and federal tax.
What about the farm equipment Under current law, the value of the equipment that has been depreciated out on tax schedules is taxed at ordinary income rates when it is sold. That makes sense, you took a deduction when you bought it to make income and then if it has any value left when you sell it, that amount is “recaptured”. Under the new laws, because of the increase in the NIIT, too much equipment sales and or equipment sales the same year as the land sale and it will be taxed at 39.6%. Ouch. Don’t forget to hold the grain until another year or that will also be hit at that high rate.
Property transferred at death receives a step up (or step down if things are bad) basis adjustment equal to the date of death value. It’s been that way since 6 years after we started federal taxing folks. The alternatives are carry over basis (meaning that you inherit the cost that grandpa paid as your basis if you ever sell) or now proposed, tax it like it was sold even if it wasn’t. Same thing for donations, if the donation was worth more when donated, pay tax on it like you sold it.
Currently, a beneficiary receives step up to the date of death. Consider this inheritance, Land – 1,000 acres at $7,200 / acre basis, Machinery – $675,000 basis Corn - $500,000 basis which can be sold without paying capital gains at all by the beneficiary. Under the Families plan, if the beneficiary is not farming, this will trigger 30% tax on the land. If they were able to meet the definition of active family this tax is DEFERRRED, not waived and is payable when the family farm is no longer operating the ground. The plan is silent on the corn and machinery in this example. If this was a gift during the farmers lifetime under the Families plan it is not real clear what happens.
As government’s continue to spend away, the lucrative pull of changing acres to residential or commercial taxation over ag will continue to draw the eye of the assessors. Having the old grey mare out back is not going to save you on property taxes like it might once have.
Iowa Administrative Code 701.711.1 classifies property into difference categories and leaves it to the county assessor to apply according to its present use. If you don’t like what the property assessor does on classification (or valuation) you need to appeal in between 2 April and 30 April. This appeal is heard by a county board of review. If you don’t like what that board says, you appeal to the property appeals board. You need to make that decision relatively quickly (20 days after the local board adjourns or 20 June, whichever is later.
In a case out of Dallas County, a 25-acre parcel with two machine sheds, a hay field and two draft horses was not enough to get ag real estate taxation. The board looked at the amount of ag activity occurring on the property and the determined it wasn’t for profit. This was despite the testimony that the draft horses might be bred in the future (one was over 20 years old and the other was less than 5). The baseball field on the property also probably didn’t help sell it as ag.
However, a machine shed used in conjunction with a farm operation in a Humboldt county case, was enough to protect the ag definition, even as the surrounding uses around the farm operation became residential. The farm operator’s intent was important. The court found that determining was it a hobby or was it with profit intent to be critical to the classification.
Having an old swaybacked mare out back is probably not enough to enjoy ag classification, the closer you live to an urban area the more likely it will not be enough. To be fair, I have never been a fan of horses. A college roommate of mine once said the horses went out of style when they perfected the internal combustion engine. That might influence me. Now, as they say on social media, don’t “at me”. Other people are more than welcome to admire, care for and espouse the virtues of horses. That is, unless you can show profit motive with detailed records, business plans, and a clear path that you are engaging in ag, not rural living with out of style animals.
Terms that might be helpful
The trust: A trust is an artificial entity, something like a corporation, created by a document or instrument.
A trust requires four basic elements - trustee, trust property, trust document, and known or discernible beneficiaries. The trust document specifies the rules of operation for the trust, the powers of the trustee, the beneficiaries to share in the income and principal from the trust, and instructions for distribution of the trust property.
Trustee: The person “entrusted” with carrying out the trust plan. The trustee can be the grantor, a third party or a corporate entity (like a bank). All have a duty to be responsible and work for the good of the trust’s plan. Duties include receipt and management of the trust assets, collection of income, accounting, tax reporting and payments, investment and income distributions according to the trust agreement.
Grantor/settlor/Trustor: The person who creates the trust (not the lawyer, the person with the assets”
Beneficiary: The person or entity. who benefits (gets the goods or money) from the trust’s plan. A beneficiary can be the grantor (individual who established the trust), spouse, relatives, friends, churches, and/or charities.
Sumner, Iowa Attorney practicing in Iowa primarily in Ag Law, Bankruptcy, Estate Planning, Real Estate Law, Family Law & Criminal Defense. Lawyers at the Dillon Law P.C. are dedicated serving Iowa, including but not limited to the cities of Allison, Charles City, Cresco, Decorah, Des Moines, Dubuque, Elkader, Grundy Center, Independence, Manchester, New Hampton, Waterloo, Waverly, Waukon, West Union & Vinton, and the communities that makeup Allamakee, Benton, Black Hawk, Bremer, Buchanan, Butler, Chickasaw, Clayton, Delaware, Dubuque, Fayette, Floyd, Grundy, Howard, Polk, Winneshiek, counties. © 2021 Dillon Law P.C. Sumner Location | 209 E. 1st Street, Sumner, IA 50674 Directions Volga City Location | 502 Washington St, Volga City, IA, 52077. We are there most Fridays 10-3 and by appointment. Directions Telephone: (563) 578-1850 Email: firstname.lastname@example.org Home | Attorneys | Blog | Ag Law | Bankruptcy | Estate Planning | Real Estate Law | Family Law | Criminal Defense | Contact | Iowa Ag Law Attorney Sumner Taxation Commercial Transactions Production Contracts Labor Hobby Farm Liability Bremer Fayette County Lawyer