When does selling the family farm pay off?
By Elaine Goodman, Correspondent
Tired of dealing with the complex ownership structure, the family decided in 2004 to sell. The buyer — who paid in cash — had just sold a ranch outside of Tracy to a developer, and was looking for land to buy that would qualify for a property exchange under IRS rules and reduce capital-gains taxes.
Many family farms are finding themselves in similar situations these days, and are looking to sell to avoid the headaches of multiple-party ownership and family disputes over money and management.
“Once you get that piece of pie too small, no one gets to taste it very well,” said Stevenson, a real estate agent with Century 21 M&M and Associates in Rio Vista.
In addition, many of America’s farmers are planning retirement. The average age of California farmers in 2007 was 58.4, up from 55.7 in 1997, according to the USDA
Agricultural Census. Nationwide, the number of farmers 75 and older grew by 20 percent from 2002 to 2007.
“You’ve got elderly owners who are not up for operating the farm any more,” Said Shermain Hardesty, who heads the University of California Small Farm Program and is a UC Davis Extension economist. The fact that smaller family farms are often labor intensive, with multiple crops and a lack of automation, adds to the impetus to sell, Hardesty said.
With commodity prices on the rise, farms have been doing well financially, Stevenson said. A growing global population and expanding middle class in Asia are increasing demand for agricultural products. The USDA Economic Research Service forecasts a net farm income of $120.6 billion this year the second highest since 1973 after adjusting for inflation.
That performance has translated to increasing values of farmland. Farmland value increased by more than 10 percent in 2005 and 2006, according to a 2012 study by the ERS. And farm earnings were able to support farmland values in 2009 and 2010, providing enough revenue to service farm real estate debt. Strong earnings have helped farmland values withstand the economic downturn better than the housing market, the report states.
With those factors in mind, some farmers have opted to hang on to their land for a bit longer, Stevenson said.
For those who sell, capital-gains tax is an issue. The tax may be deferred through a property exchange, such as the one used by the buyer of the Stevenson family farm. internal Revenue Code Section 1031 allows a property seller to postpone paying tax on the gain if proceeds are reinvested in a similar property a qualifying transaction.
If there’s not an urgency to sell the farm immediately, the land may be sold off in pieces, or via installment sales, to reduce capita! gains taxes, Hardesty said.
In situations where one of the farmers children wants to take over, estate taxes become a consideration in passing the land to the next generation. Up to $5.25 million in assets are exempted from the federal tax, according to Larry Hansenr financial adviser and CEO at Capitol Planning Advisors Inc. in Sacramento. After that, a federal estate tax rate of 40 anplìesd and the amount, which may be hefty, must be paid Within nine months, Hansen said.
“It can certainly create a situation where it might force the sale of the farm,” Hansen said.
Gifting strategies can be employed to avoid such a situation, Hansen said, but advance planning is needed for them to be effective.
Sale tease-backs and other options
An increasingly popular option is selling farmland and leasing it back. For exampie, a farmer might be thinking about retirement, but is in good health and wants to continue farming for a few more years, said John Taylor, national farm and ranch executive for Trust,
Bank of America Private Wealth Management. U.S. Trust’s clients buy farmland to diversify their investment portfolios.
“You’ve got a lot of farmers who are getting toward the retirement age,” Taylor said. “A big portion of their net worth is tied up in that land.”
Selling the land frees up money for the farmer’s retirement and estate planning, Taylor said.
And younger farmers might want to sell their land and lease it back to obtain money to buy farm equipment or additional land. While older farmers typically owned most of their land, younger farmers are often leasing the majority of land and owning a smaller portion, Taylor said.
U.S. Trust prefers to lease the land back to the seller, Taylor said, as long as the farm has been run well and the farmer is willing to pay market rent.
Conservation easements are another way to get cash from farmland while continuing to run the farm. The easements, typically sold to a 1and trust, restrict future use of the land, preserving it for agriculture, according to James Leet, attorney and shareholder with Boutin Jones Inc. in Sacramento. The value of the easement may be as high as 40 percent of the value of the land, Leet said.
A farmer looking for a tax deduction rather than cash might want to look at gifting the conservation easement, Leet said. For transactions made next year, the gift of a conservation easement may be deducted up to 50 percent of the donor’s adjusted gross income.
There’s heightened interest in protecting agriculture land from residential and other types of development now that the recession has subsided and development is picking up again, said Hardesty of the UC Small Farm Program. Some municipalities require a developer to purchase a conservation easement as mitigation for developing farmland, she said.
California’s total amount of farmland has been shrinking, from 28.7 million acres in 1997, to 27.5 million acres in 2002 and 25.3 million acres in 2007.
Another farm-preservation effort is California FarmLink, a nonprofit that helps small and mid-size family farms. The organization matches farmers looking to buy or lease land with farmers who have land available. FarmLink also makes direct loans to farmers and facilitates outside lending, assists with farm succession planning, and offers farm management training.