Buying or renting farmland

farmfinance

Buy the Farm or Rent the Farm

By Erin Harvey One thing we know for certain in farming and ranching is, having enough land is vital. According to the USDA, approximately 39 percent of the farmland in the U.S. is rented. More than half of cropland is rented, compared to just over 25 percent of pastureland. You may currently be in a situation or possibly down the road where you need to buy or rent land. As a farming operation grows, significant changes can result from expanding your acreage whether through rental or acquiring by purchase, including major tax implications. Let’s break down a few pros and cons to each. OWNING THE LAND

• You’re in charge of all management decisions from crop rotation to improvements. • You don’t have to worry about rental agreements or the possibility of it being rented to someone else. • Your equity position will improve and open the possibility of borrowing more. Interest rates are low right now, so it might be a good time for you to lock in long term pricing. • Farmland property taxes are tax deductible, however, this does not include property taxes from a house or land with a home on it. To determine the amount of property taxes that are tax deductible for an operation, compare the value of the home with the value of farmland. Remember, neither the principal payments on a farm real estate loan or the down payment of your purchase are tax deductible. Interest payments on the real estate loan as well as equipment and operating loans are tax deductible. • Buying can be expensive and the price per acre continues to climb. Can your cash flow support the payment if you purchase? Do your plans for expansion need to be put on hold?

RENTING LAND

• Renting is generally a cheaper option. Young and beginning farmers may find it to be a much more affordable way to get started and often a knowledgeable landlord can offer insight for management practices. • By renting, you can free up your cash flow to buy equipment, livestock, and inputs. • Sometimes renting involves a short term contract which may not match up to your goals and you may need multiple years to return on your investment. • The landlord could decide to not renew your rental contract. • Unlike farmland loan payments, when renting land, you can use the whole rent amount as a tax deduction. A rent payment typically includes the property taxes for the ground and the cost of the privilege to farm the land. If an operating loan is used to pay for the rent payments for the land, the interest incurred from the loan is also an eligible tax deduction. This again applies to equipment loans or other operating expenses needed, depending on the rental agreement. While owning land allows for more tax write-off possibilities, renting may allow you to write off larger amounts.

Before you decide, do your homework, run the numbers, and talk to your lender. Look at a recent soil survey to determine if the property meets your needs and plans. If there are certain zoning restrictions or if the property is in a flood hazard area, you will want to know up front. I even recommend discussing your options with a realtor that is knowledgeable about current real estate prices and quite possibly the property you are interested in. Also, talk to your insurance agent to find out what liability coverage might be necessary and an estimate of premium costs. While there are tax benefits for both owing and renting, the best answer is the one that benefits you and your operation the most.

Erin Harvey is a CRCM, vice-president at Community National Bank & Trust in Lamar, Mo. She can be reached at erin.harvey@communitynational.net

what do you say?

Why is it important to have a financial plan in place for your farm?

“A financial plan gives you the tools to evaluate profits and losses so you can modify as needed to maintain and expand your business. Without it, evaluation is more guesswork than achieving success.”

Nicole Dorsey Mayes County, Okla.

“While a financial plan also allows you to monitor operations and identify possible areas to shore up, it is also extremely helpful when the person in charge passes because you have a template to start working from.”

Merrit Armitage Rogers County, Okla.

“COVID happening is the perfect example why. The market tanked, and there will always be circumstances you don’t have control over. The first thing you need to have is a good relationship with your banker.”

Brent Cooper Sebastian County, Ark.

“The biggest reason is to see if you are making or losing money. You need to make sure bills are getting paid and you are making some money on top of that.”

Ed Linck Franklin County, Ark.