This is how taxes work on investments in farmland


    Agricultural Investment Taxes

    Farmland investments offer investors a unique opportunity to invest in agriculture and real estate at the same time. And it’s an asset that is relatively uncorrelated to the stock market.

    Those are two benefits that can make investing in farmland attractive. However, farmland investors need to understand the unique tax time investment.

    If you own farmland or have sold farmland in the last year, here’s what you need to know about farmland investment taxes.

    Curious about investing in farmland? Check out AcreTrader here >>

    Types of taxes for agricultural investment

    Farmland investors typically pay income taxes on rental income from the farm and capital gains taxes if they sell the farm for a profit. Below we break down how both types of farmland investment taxes work.

    Rental income

    Lease income from the business is taxed as “unearned income”. Investors pay income tax on the net income from the farm, but do not have to pay social security and health insurance taxes.

    Net income includes all rental income minus legitimate expenses. Farmland investors can receive distributions that exceed or fall below net income. But the taxes they pay are based on income.

    In the past, most farmland investors owned land directly, but that is starting to change. Companies like AcreTrader make it easier for smaller investors to invest in farmland. These companies typically use the partnership model to structure business. If an investor uses a partnership or corporation to invest, the net income from the society is taxed.

    capital gain

    When farm investors sell farmland (or shares in a farm investment company), they pay capital gains taxes. If you own the farm for less than a year, all profits are subject to short-term capital gains rates. Investors who own farmland for more than a year will pay the lower long-term capital gains tax rates.

    Agricultural investment tax forms

    The tax forms a farmland investor must submit depends on their investment activity and the structure of their investment.

    Direct farm owners can complete IRS Form 4835. This form contains information on income and expenditure related to the ownership of arable land. Once the form is completed, the information can be transferred to Appendix E. Appendix E is the part of a tax return that shows passive income such as rent or license fees.

    Investors who own farmland through a pass-through company or business do not need to complete IRS Form 4835. Instead, they will receive a Form K-1 from the company. This form can be used to fill out Appendix E of the tax return. A K-1 is a form that reports the revenue cost base in a business along with revenue and losses.

    When an investor sells farmland (or shares in a farmland investment), the final profits are shown in Appendix D. Direct farmland owners must be responsible for keeping track of their cost base and profits. Investors using the partnership structure can usually use the K-1 form to indicate their cost base and final profits.

    Filing taxes on agricultural assets in multiple states

    Farmland investors are always required to file state tax returns in the state where the farm is located. This can be done through compound tax returns or individual government returns.

    Compound tax returns

    Most states allow a transit company (such as an agricultural investment company) to file a compound declaration on behalf of its non-resident individual owners. This return replaces the need for individuals to file in these states.

    When a farm investment company files a compound declaration on behalf of its investors, individuals are not required to file a second declaration themselves. The state where the farm is located receives taxpayers’ money when foreign investors pay income tax in their state.

    The composite tax return is the easiest way for investors to file taxes. But some states don’t allow it.

    Individual government returns

    With an individual state return, an investor must file his entire tax return in the state in which his farm is located and in which he lives. You will be charged income tax in proportion to the amount of income earned in that state. Filing state taxes in two states does not result in the payment of duplicate state taxes.

    A person earning $ 5,000 in agricultural investments in Nebraska and $ 95,000 in wages in Minnesota must file returns in both states. Nebraska will levy income tax based on $ 5,000 in income. Minnesota will collect income tax based on $ 95,000 of income. Most tax programs make it easy to file multiple government returns, as long as you fill in the information correctly.

    Can I claim depreciation on arable land?

    Depreciation is used to spread the cost of an investment over the useful life of the asset. But unlike most real estate investments, farmland has an indefinite useful life. Therefore, it is usually not depreciable.

    However, there are exceptions to this rule. Fruit and wine crops have a finite production life cycle. Therefore, land with these crops includes “deductible improvements”. In addition, structures such as barns, irrigation systems or other improvements are subject to wear and tear. These assets can be withdrawn.

    Other legitimate expenses can also be deducted. For example, farmland investors who own physical land may have to pay for seeds, labor, and equipment rental (to name a few expenses).

    Passive farmland investors rarely have to worry about the breakdown or recovery of legitimate expenses and deductions. The company that manages the investment will typically report income and losses on your IRS Form K-1.

    Final thoughts

    If you’ve invested in farmland through a company like AcreTrader, filing taxes should be relatively easy. The company should send you a Form K-1 by March 15. It should also tell you whether you need to file a tax return in multiple states or just in your state of residence.

    You can then enter the information from your K-1 into any control software. The software then uses the information in the declaration to calculate your tax burden accordingly.

    Filing taxes in multiple states usually incurs additional costs. However, it isn’t difficult to use tax software like H&R Block or TurboTax. By simply following the workflow for multiple states, users can archive accurately.


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