by Deborah Jeanne Sergeant
Many farmers want to pass on their land to a family member or a young farmer when they’re ready to retire. Since the cost of land, equipment and buildings is often higher than beginning farmers can afford, farmers anticipating succession should plan ahead to ensure their land goes where they want it to go. Practical Farmers of Iowa presented “Making the Land Affordable for the Next Generation of Farmers” as a recent webinar, hosted by Dale Nimrod, a farmer who has completed two succession plans, along with his attorney, Karl Knudson, and Matt Roberts, a certified financial planner in Des Moines. Sally Worley, representing Practical Farmers, emceed.
“Beginning farmers are urgently needed,” Worley said. “Our current population of farmers are aging. There’s many farm owners who are considering the future of their farmland. We’re seeing eagerness among people looking forward to farming.”
Nimrod transferred his farm to beginning farmers Mark and Melanie Peterson so he could downsize and retire. He also oversaw the sale of his parents’ farm after his mother retired. His parents had purchased it in 1944. His father passed away within nine months of acquiring the farm, when Nimrod was five. “My mom made it work to stay on the farm,” Nimrod said.
With help from the community, the family persevered and the three children eventually grew up and moved away. Nimrod’s mother continued to live on the farm. By 2005, she was ready to retire, but none of her children wanted to live there. Nimrod and his siblings took possession of the farm in the 1980s and wanted to help their mother sell to someone who would continue to use the land in agriculture.
“Like nearly every aging landowner, we aspired to find a young family who’d appreciate the land,” he said. “That ruled out selling it by auction. I was smart enough to realize that young families desiring to farm couldn’t compete at an auction of a 240-acre farm.”
Nimrod said community members had helped his family “make it” in farming. He considered auctioning off the farm and donating the funds to the community; however, he felt strongly that bringing more people to the community – not money – would ultimately benefit it more.
Nimrod contacted a minister in the area to see if he knew of anyone looking for a farm and that led him to the Petersons. Nimrod said he felt he “lucked out” finding the couple.
“My brother Vance had located a program where the payments could be made from its earnings,” Nimrod said. “We sellers required the buyers to fill in the anticipated income and expenses on a spreadsheet; we tacked on a modest extra and that was the price. A key word is ‘production value.’ The buyer was required to do the calculations and meet with our approval. It’s pretty accurate to say we sold the farm to the Petersons for its production value, which made it affordable. We made much, much more than the dollars we would have made from a land auction’s dollars.”
The family can rest assured their beloved acres will keep producing food instead of ending up developed into commercial projects. But they didn’t go through the process alone. “The financial advisor at our bank was very, very helpful,” Nimrod said. He also depended upon guidance from attorney Karl Knudson.
As for himself, he and his wife purchased their 250-acre farm. Once Nimrod wished to retire, one of their children wanted to live there and farm it.
“Our other two kids are tickled that their third sibling wants to keep it in the family but much must be done to achieve fairness,” he said. “We’ve been getting help from professional people.”
The Nimrods used their will as a vehicle to transfer the farm. Knudson set it up so each child would inherit one-third of the estate, and the son who wants to farm could buy out the other two in a 20-year contract at a yet-to-be-determined price and interest rate.
“The price would be the production value,” Nimrod said. “A fair interest rate would also be determined.”
Knudson said that calculating the production value of the property is important in these situations. He looks at what the rental value would be so if someone rented it out they could cover the property tax.
Another issue is if someone wanted to sell property for production value during their lifetime.
“The issue there is that if someone has owned a farm for a long, long time, there’s likelihood they have a low tax base,” Knudson said. “There’d be a high capital gain tax because of appreciation of value.”
He said the solution for Nimrod is to sell just the house now to avoid capital gain, then transfer the farm under productivity value through the will at death.
“In Dale’s situation, his son is already on a farm, and he has a son that wants to move to his farm. We could do a like exchange to avoid capital gain. That’s not the primary focus of what we’re doing here,” Knudson said.
Since there are three heirs, the one receiving the farm would pay for two-thirds of the value to the estate since he is inheriting his own third.
If the property owner is renting out the land, they could also value it by the rental rate “instead of trying to bring in some of these other figures,” Knudson said. “If the owner farmed it himself, or rented to a relative for a low price, you’d have to look at other means.”
He also said that a federal estate tax exemption allows a person to leave up to $11.58 million in property without the descendent owing such tax.
Roberts offered his analysis of Nimrod’s transfer of his mother’s farm: “If that farm was held by Dale’s mother and transferred or gifted to Dale and siblings, that would have been the basis of Dale’s interest in the farm. Whatever that farm was sold for – there’s quite a bit of appreciation. If sold at a lump sum, that gain would be taxed in one year. Capital gain is 15%, a special rate. As you get to the top tax bracket, it goes up to 20%. If sold as an installment note, that would be spaced out for 20 years or the length of the note. The interest rate would be taxed as ordinary income to Dale. That was an interesting chain of events.”
As for Nimrod’s farm, Roberts said when his son purchases the farm at Nimrod’s passing, he could do so with minimal income tax consequence because the value of the farm would be fairly similar. “The tax owed would be based on the interest rate based on the note. The siblings bought out would have to pay income tax on it,” he said.
If the farm is purchased during Nimrod’s life, then the farm would be subject to capital gains without further planning.
“Dale’s basis would be what he bought the farm for and the gain would be whatever the productive value is minus the basis if it were lump sum,” Roberts said. “If in installment, it would be spread out.”