We seem to get questions several times a year from farmers asking if they can own farmland in an IRA. The technical answer is yes, you can, but the more important practical answer is you should not own farmland in an IRA.
Most farmers who want to buy land in an IRA or retirement account also want to farm the land. Also, in many situations they would like to borrow part of the money to purchase the land. This will likely lead to the IRA or retirement plan having a prohibited transaction which will result in all of the IRA being fully taxable.
What actions are prohibited?
- The farmer or anyone closely related to them cannot farm the land.
- Rent should be based on fair market value.
- The farmer can’t personally do any work on the land. This means you can’t mow the waterways; you can’t personally maintain any of the land or paint the building on the land, etc.
- If you borrow money to purchase the land, you can’t personally guarantee the debt.
- If you do borrow money to buy the land, part of your rental income will be subject to income tax and the IRA will need to file an income tax return.
- Once you reach age 72, you may need to partially distribute the land each year to meet your required minimum distribution requirements which requires additional legal work and filings.
These are the primary things that you can’t do. In order to do this inside of an IRA you will need to find an IRA custodian that will handle the transaction and the ongoing ownership of the land. This will result in extra fees and they can easily eat up 10-20% of the annual rents.
Plus, each year you will need to obtain a qualified appraisal to determine the fair market value of the property.
The bottom line is you can do it, but we would recommend not doing it or make sure you have proper counsel on structure and operations.
A recent case dealing with an IRA owning gold in a safe located in their home shows how this can lead to unintended consequences. In the McNulty case decided on November 18, 2021, the Tax Court ruled that a taxpayer who had purchased over $400,000 of gold to be held in her IRA and stored in a safe in her home was taxable on the gold.
IRAs can purchase certain gold coins, however, these coins need to in the control of the custodian, not the taxpayer. In the case, Mrs. McNulty cashed in various tax-deferred accounts and invested the funds into gold coins that she held in a safe in her house. The Court ruled that this control was sufficient to make the ownership a taxable event resulting in substantial taxes, interest and penalties.
This case reinforces the risk that farmers face if they own farmland in an IRA.
