When I was a kid, a popular song referenced a vegemite sandwich. I had no idea what that was for a long time nor did the school dictionary help. When I finally ran into it, I learned real quick what it was and it gave me great into the land “down under’s” palate.
Ag law has its own vernacular and knowing those terms will go a long way towards a successful operation. Let’s take a look at some of the terms of art that the farm operator/ landowner is going to run into. This time we will look at taxes and real estate terms.
Warranty Deed. I own this and when I sign it over to you, I will defend the title against anybody who say otherwise.
Quit Claim Deed. I may or may not have an interest in this property, if I do, here it is. Good luck, don’ t call me when things go south.
Quick Claim Deed. Not a real term. Don’t use it.
Abstract: A history of the property showing ownership, current liens, easements and other items impacting little. Usually updated by the seller of property (or the borrower if refinancing) and then examined by an attorney to establish title and what defects, if any, need to be addressed. The updates don’t last forever, and the abstract must be updated before examination.
Title Opinion. An attorney’s written findings of the examination of the abstract.
Contract Sale. An installment sale where the owner serves as the bank -essentially. The Buyer is in possession as long as they make the payments and if they don’t, they can be removed from title and forfeit all payments. When they complete the payments, they received a deed.
Rent to own: Not a concept. Either you are buying on contract sale or buying with a lump sum of cash (sometimes provided by a bank). While you can enter into agreements that say I am renting for X and if I buy the property then Y out of my X rent payments will reduce the purchase price, those agreements are not suitable for residential purchases and must be carefully crafted.
CSR/CSR2: Corn Suitability Rating. This is based on soil type and is a factor in Iowa land valuation for many. The higher the CSR, the more desirable the ground is for row crop production.
Amortization: a schedule of showing how payments are applied over time.
Appraisal: The value established by a 3rd party professional based on market review and other factors.
Assessment: The value of the property established by the government or its contractors for taxation.
Land Basis. The cost of real estate. Established by how much you paid for it, how much it was worth when you inherited it, or how much the purchaser paid for it before they gave it to you.
Gift. A complete transfer of control and ownership of an asset to another. Taxes are owed by the gift giver if it exceeds certain thresholds. Gifts are not income.
Capital Gain/Loss . Gain- The positive difference between Basis (minus depreciation taken) and sale price of capital assets (land, stock, etc.) . This is subject to federal and state tax based on a scale regarding your other income and your use of the property. If you hold property less than a year it is short term capital gain and that is generally taxed at a higher rate (to discourage churn in the marketplace) than long term capital gains. If you lose money, that is a Capital Loss. Capital Loss is limited as a deduction to $3,000 per year or up to the amount of any capital gain in that tax year. Same rules regarding short term and long-term capital loss.
Depreciation. A tax declaration of a reduction in the basis of a business property to account for its consumption in the course of doing business. This reduces your taxable income to reflect an expense of your operation. If you sell an item that you have depreciated for more than what remains in its value, you can be taxed on the difference as “recapture” as the expense you previously took has been recovered and is now considered income. Different types of assets have different depreciation life spans. Some items can have accelerated or “bonus” depreciation allowing them to be taken as an expense faster than is otherwise normally allowed under the tax code (aka 179 or Bonus). Land does not depreciate.
Deduction: An expense the offsets income. If the expense is made in the pursuit of generation of income, it may be deductible. Expenses incurred as part of everyday living are generally not deductions. Certain categories of living expenses (health care, real estate taxes, charitable giving) may be deduction in some cases.
Itemization. A tax technique where you report your certain items of living expenses to off set income. These itemized deductions are subject to a percentage reduction based off your total income and must generally beat a “standard deduction” that the government allocates to taxpayers to avoid having to review everyone’s itemized deductions.
Recapture. Tax imposed when you depreciate an item and then sell it for more than what the depreciated value is. Example, I have a$5,000 truck that has $3,000 depreciated against it. I sell it for $5,000. I pay recapture on the $3,000. If I had sold it for $2,000. I would have no recapture.