It is widely known that land is not depreciable and therefore only generates a capital gain tax obligation when it is sold. Capital gain rates will apply, which are generally lower, if the land has been owned for the minimum period of time — more than one year. However, if the land at the time of purchase has improvements on it such as fences, corrals, barns, grain bins or orchards (pecan trees), a portion of the purchase price can be allocated to these assets and a deduction on Schedule F can be taken each year during the time period allowed. Assets have different time periods for recovering their costs through depreciation. Allocating a portion of the purchase price to the attached improvements and deducting depreciation each year allows a farmer to delay the recognition of income by delaying the payment of taxes until a later year. When the depreciable asset is sold, the amount of gain due to depreciation has to be recaptured as ordinary income. If a depreciation deduction was not actually taken, the IRS still requires the amount of depreciation allowed to be recaptured as ordinary income. Income tax is due on ordinary income at the normal tax rate for the farmer's adjusted gross income level. The postponement of tax is generally a good farm management decision. One must keep in mind that the goal of not paying income tax should not be achieved at the expense of good farm management decisions.

When a farm is purchased with a house on it that the buyer plans to make their personal residence, the amount allocated to the "personal residence" is very important. The tax revisions passed in 1997 allow taxpayers to exclude up to $250,000 of gain ($500,000 for married couples filing a joint return) realized on the sale or exchange of a principal residence occurring after May 6, 1997. To be eligible, the residence must have been owned and used as the taxpayer's principal residence for a combined period of at least two years out of the five years prior to the sale or exchange. This exclusion of gain on the personal residence can have a huge impact on the cost of selling a farm.

An option that is available to both buyers and sellers of land is an installment sale - a sale of property where you receive at least one payment after the tax year of the sale. This option is attractive to the seller because only a portion of the gain is reported each year. When a payment is received, the amount reported as gain is the same percent of the payment as the total gain is of the total sale price. For example, if a farm sold for $200,000 and the basis at the time of sale was $160,000 (in this example, it is assumed there are no assets included in the sale price that have been depreciated, because any gain due to depreciation has to be recaptured as ordinary income in the year of sale regardless of it being an installment sale), the gain would be $40,000 or 20 percent of the sale price. If the buyer and seller agreed to an installment sale then the buyer would need to report 20 percent of each installment as gain. This provides a farmer an income flow over a number of years and may allow him to be in a lower tax bracket. The interest rate received on the amount included in the installment sale may be more than would be commercially available, plus it allows the tax on the gain to be paid over a number of years. The seller must be careful to separate principal from interest on each installment. The interest portion must be reported as ordinary income.

An installment sale is attractive to a buyer because it allows the opportunity to secure financing and make payments over a period of time at possibly lower interest rates than what would be commercially available. Young beginning farmers find installment sales especially attractive because they have a limited amount of cash to put down and, thus, face more challenges in obtaining financing. Related persons must be careful in using installment sales since this method cannot be used for depreciable property in most cases between related parties. The installment method can be used between related parties for land, since it is not depreciable.

Another item that can have costly implications is acquiring assets by gift versus by bequeath. A donee (person who receives a gift) usually receives the same basis in an asset as the donor (person making the gift) had in the asset at the time the gift is made. Therefore, when a farmer decides to make a gift ($11,000 tax free) to someone, that person will receive the farmer's basis in the asset. In the case of land that was purchased at a much lower value than the current market price, when the donee decides to sell the land, a sizeable tax obligation could be incurred because of the difference in the low basis and high sale price yielding a taxable capital gain. To the contrary, if the person inherited the asset, the new owner would receive a "stepped-up" basis, which would reflect current market value. When the asset was sold, it would have a higher basis and may generate little or no taxable gain.

These are only a few of the many issues that buyers and sellers of farm business property face. Much has been written on the alternatives and options available to buyers, sellers and those who may want to exchange assets. There are costs and benefits associated with each strategy. The best way to determine which may be the right choice is to sharpen your number two pencils and get out the Big Chief tablet and work through the necessary calculations. It will pay more than most things we do as farmers working on the farm.

This article was contributed by Dan Childs of the Samuel Roberts Noble Foundation.

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One of the core principles of the Greenwood Project is that land is an investment that is to be enjoyed.  When you choose to lock your liquid assets in land, you are getting more than a piece of property,  you are getting a place to experience the outdoors or create lasting memories.  Land is the only investment vehicle that will bring you more than just revenue; think of the time spent riding the ATV, Cooking out with family, or just camping on the farm.  The enjoyment of the land ownership experience is an important component to investing your hard earned money into land.

The problem that most of us have when it comes to buying land is we feel lost and the task seems overwhelming.  The fear of failure has stopped many investment deals, some of which may have been highly profitable.  The reality is we are not born with the knowledge or competency to make these investment decisions and so we back away from the opportunity.  There is a tremendous gap that exist in the minds of many "would be" land investors when it comes to the HOW of land investing.

It is the purpose of Greenwood Project to bridge the gap and make the connection between "I want to. . ." and "I did it . . . ."  The Greenwood Project has an entire educational series on how to buy land.  Land investment is only difficult if you do not have the right resources and knowledge and "Maximizing the Land Ownership Experience" is the resource you need to acquire the knowledge necessary to make that investment in land you have always wanted.

Bet you’ve heard that at some point in your lifetime. It’s an old cliche’that will stand the test of time. At the moment the first map of the world was plotted, the birth of the idea, and the cliché that land isn’t being created any longer, has been known by all human kind.

One of the first and few things I actually learned at the local school of higher knowledge was the theory of supply and demand. Amazingly land may be the only investment in which the supply number is one that can’t change. You can’t say that for houses or condominiums or office buildings. You can’t say that about livestock, stocks, cars, or even baseball cards. The supply of these investments is determined by the demand hence, the greater the demand, the greater the supply.

However, the greater the demand for land, the greater the cost of land. 

Simply put......the supply of land never changes. It can't! From a land investor’s perspective, it’s a beautiful thing. But land ownership is much more than an investment. The reality is most land owners did not become land owners primarily out of the need for an investment or financial gain. Most land owners became who they are by an instinctual need for relaxation, recreation, conservation, and even some through America’s greatest way of gaining financial worth,….inheritance.

But if you ask, most of them will tell you that the investment aspect of their ownership experience is merely the icing on the cake.

Some cliché’s will always remain true, “Land, they ain’t making anymore of it.”