Within that, the constant is that taxes will change but will always be present.
The likelihood that major tax reform legislation will be introduced and passed in 2017 is high. Some believe that like-kind exchanges remain at a high risk for repeal. Many have used this process to delay capital gains tax by selling farm ground, and instead of taking a check, replacing it with additional farm ground in other areas. As equipment becomes bigger, the value of having adjoining parcels cannot be disputed.
In the local market, pressure in the mid 2000’s came from investors with proceeds from sales near large metropolitan areas. These investors were quick to bid up ground, as they were motivated to delay paying capital gains. As the market tapered off slightly, the investors sold their holdings locally and moved towards Missouri and Kansas where ground was not booming at the same rate.
Land can account for up to 100% of farm operators “retirement”, and is on average, 30% of commercial investments. The statewide average value for an acre of farmland is about 17.5% lower than 2013 peak values, with declining values for the last three years (5.9% in 2016). Prices stay high when demand is high and supply is low. The desire to avoid capital gains tax has been shown to increase demand. The lion’s share of ground in Iowa is held by those who have a high probability of needing expensive nursing home care in the next 20 years. Like-kind exchanges could help keep the market up for land prices, even in the face of additional sales in the coming years.
The House Republican Blueprint for Tax Reform doesn’t address like-kind exchanges, which are disfavored by some. It proposes full expensing for all capital asset acquisitions, excluding the cost of the land. Right now, land improvements of certain types need to be added to the basis of the property, and not deducted as an expense or depreciated. Full depreciation of real property improvements may well face stiff resistance.
The Blueprint proposes a maximum tax rate of 16.5% for capital gains. President Trump has proposed a maximum rate of 20%.
Leases are old news in the U.S. farm community; we have been doing them for a long time. However, how we lease is changing. Landowners are recognizing the value of the data generated by the farm operator in order to make better decisions about what the land value might truly be. Tenants are using the data to determine which farms are truly profitable, and which ones are lemons to be shed or demanded lower rent for.
You can choose from several types of lease arrangements. They all come down to three basic types:
Crop share production, government payments, and crop insurance are shared between the landowner, and the operator who provides the labor. These arrangements also involve sharing crop expenses. The problem is the landowner is still worrying about the weather and the markets. It is a great fit for the first couple of years after a land owner has had to quit farming themselves. It is almost like a half-way house for farm land owners moving to cash rent arrangements.
Cash rent really needs little explanation. The key is setting the price and the timing of when the payments are due.
Flexible lease arrangements provide a base cash rent, plus a bonus, which represents a share of gross revenue in excess of a base value. This allows the landowner to have a set price, but still capture some of the good year’s prices. It also ensures that in bad years, tenants aren’t paying for a tuxedo when all they needed was flip flops and a bathing suit.