Many farmers, especially those in the Midwest that apply animal manure, are able to deduct excess fertility when they purchase land that they are currently not farming.
These farmers get a professional agronomist to survey the property and then determine the amount of excess fertility that might be present in the ground. This excess fertility is then amortized based on the useful life of the fertility. We typically see that 60% is deducted in the first year, 30% in the second and the last 10% in year three.
This deduction could easily approach $1,000 per acre. However, many states such as Minnesota are very aggressive in auditing these deductions. You will lose on an audit if you do not have a professional agronomist opinion.
But this post wants to remind these farmers that if they sell this land, they will need to recapture this excess fertility as ordinary income. It does not qualify for capital gains treatment. Since our assumption is that you are good farmer, the excess fertility has been likely maintained under your ownership, therefore, recapture must be done.
Here is an example:
Jim buys land in Minnesota for $12,000 per acre in 2022. A professional agronomist indicates that $900 of the purchase price is due to excess fertility. He deducts $540 per acre in 2022, $270 in 2023 and the remaining $90 in 2024. In 2028, he sells the ground for $15,000. He reports $900 per acre as ordinary income and the remaining $2,100 is capital gain.
Now, if you end up passing away and still own the land, then the recapture will be eliminated, but if sold during your lifetime, it will remain.
