Retirement Planning With Land

January 27, 2016 02:36 AM

Consider risks and opportunities of owning ground in an IRA 

Farmers tend to view their farmland as a retirement asset. When you’re ready to slow down, the thinking goes, simply rent out your ground or sell it and use the profits to fund costs such as health care needs or a new RV. 

There might be another option: investing in farmland with a self-directed individual retirement account (IRA). Unlike other types of retirement accounts, self-directed IRAs allow you to buy assets beyond stocks and bonds, such as farmland. 

Although IRS rules tend to favor landlords or outside investors more than farmers, this option could be a way to increase your land base. 

“Investing in farmland via an IRA is a great tool, but it usually sounds better than it actually is for farmers,” says Steve Bruere, president of Iowa-based People’s Company, a land brokerage and appraisal firm.

The first big catch is you, as the owner of the IRA, cannot farm the land. Neither can your spouse or lineal ascendants and descendants. 

Options To Explore. Yet other strategies are on the table. Siblings and relatives further removed from you can farm the land. “Or Farmer A could buy a farm to rent to Farmer B and vice versa,” Bruere says. Non-relatives could invest in your operation by purchasing land for you to farm with their IRA.

The next step is to find a custodian to administer the asset. 

“Farmland is a weird asset,” says Paul Neiffer, principal at CliftonLarsonAllen. “The big financial companies want the easy stocks and bonds and aren’t interested in this type of investment.” 

Because IRS penalties can be huge, Neiffer suggests visiting with your tax adviser or a company that specializes in self-directed IRAs to see if they are a good fit. 

As with any farmland purchase, locating ground can be difficult. 

“It can be hard to find a farm that’s the right size to match with your IRA,” notes Bruere, who has personally invested in farmland through his IRA. “It can take a significant portion of your IRA to come in and pay cash for an asset.”

Many stars must align for this to be a good option for farmers, Bruere notes, but IRAs can be valuable.

Navigate These Farmland Restrictions When Using An IRA

The advantage of buying farmland with a self-directed IRA is that income and gains grow tax-deferred. Yet strict guidelines exist, say Steve Bruere, president of People’s Company, and Paul Neiffer, principal at CliftonLarsonAllen. 

  • You, as the investor, cannot farm the land purchased through an IRA. Your lineal ascendants and descendants also are not allowed to farm the land because of IRS rules. 
  • You, your spouse or your lineal family members cannot sell farmland currently owned to your IRA or purchase land from your IRA.
  • An administrator or custodian is required to hold onto assets.
  • You must provide annual third-party evaluations of the farmland.
  • Self-directed IRAs require that once you reach a certain age, you must start withdrawing minimum distributions. Liquidating farmland assets is more complicated than liquidating stocks and bonds. 
  • If financing is required to buy land, you cannot personally guarantee the note, and if you purchase farmland with debt, the IRA may be subject to additional income taxes while rented and when sold.


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Spell Check

Lexington, TN
2/1/2016 11:24 AM

  Additionally, can you Lease the land to either Hunters or the USDA for CRP? Same questions also per prior comment. Thanks so much for doing this article.

larry k
chicago, IL
2/1/2016 06:52 AM

  Lot of information left out. Can you build a house on the property and live in it? Can you develop it with agricultural structures? Can you lease out to sign companies or cell tower companies? What about the real estate taxes?


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