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.
Real Estate Includes Land but Not For Depreciation Purposes
Mar 17, 2014
We had a reader send in the following comments and question:
"I appreciated your information on the tax reform proposal. In your 4th bullet point on depreciation, you stated that "Most if almost all farm real estate...would be over 40 years and not the current 10 or 20 years." It has been my understanding that land real estate is never depreciable, but farm buildings are depreciable. Does the term "real estate" refer only to land or does it also include farm buildings or structures? Could you help me understand your statement above, and clarify my question?"
When discussing depreciation in regards to farm real estate, we are normally referring only to the buildings or structures that are attached to the land. As the reader indicates, land is never depreciable, however, the buildings attached to the land can be depreciated. They are usually depreciated over either 20 years for most general purpose farm buildings or in the case of single purpose agricultural structures, these are depreciated over 10 years. In some cases, what most people would consider to be a building, such as a potato storage shed, is actually considered more like a piece of "equipment" and usually depreciated over seven years.
The proposed tax reforms by both the Senate and House would stretch these lives out to 40 years for almost all farm buildings. Their is a chance that single purpose ag structures would retain a 10 year life, but I would not count on it if tax reform goes through.
Now many people ask me why does Congress really want to make these changes. depreciation is not an extra deduction, but rather just a timing mechanism for when the deduction will be taken. There lies the rub. The scoring of these tax reform changes are based over a 10 year period. By stretching out the lives to greater than the current lives, more revenue will be generated in the first 10 years. It does not matter that there will be less revenue for Congress after 10 years, they really only care about the first 10 years.