The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
You Can Use an IRA Too--Maybe!
Jun 04, 2010
My post from yesterday resulted in several comments and questions that I would like to respond to.
One comment is that code section 4975 deals with prohibited transactions regarding you and your pension plan or IRA. There are severe penalties for not obeying the rules regarding these transactions. However, if you obey the rules, the penalties do not apply to you. I sometimes find that other tax advisers are not comfortable with these rules and would rather not have to deal with these types of transactions; however, if you follow the rules and use a company that is extremely familiar with the rules, you should be in compliance.
The majority of these rules do not allow you to sell or rent land, equipment, etc., between your pension plan or IRA and yourself. However, in my post yesterday, the transaction described involved the purchase of the employer's stock directly from the employer to the pension plan. This is one of the transactions allowed by the code as long as you follow the rules.
Another question was whether you can use an IRA to do this. The general answer is no; however, in most cases, once you set up your 401(k) or other pension plan with your new corporation, you can roll over your IRA to the pension plan and then have it purchase the stock. This will allow you to use the IRA in an indirect way. Certain types of IRA rollovers may not work, so as in call cases with my posts regarding tax laws, talk this over with your qualified tax adviser.
Another reader asked if you can purchase farmland using this method. The answer is yes, no and maybe. For it to be yes, the corporation would need to purchase the land if you are going to farm it. If you are simply purchasing the farmland to rent out to a nonrelated third party, you can use the IRA or pension plan to purchase the land directly. However, if you fund any of the purchase with debt, there are several rules that come into play. You cannot personally guarantee the debt. In most cases, it would need to be seller financed for the deal to work. If you personally are going to farm the land, then you cannot have the IRA or pension plan own the land and rent it to you.