December 29, 2023
Potential Tax Benefits of Farmland Investments
Real asset investment strategies have seen strong growth over the past 40 years, propelled by historically attractive returns and portfolio diversification benefits. Beyond these historical benefits, investors are increasingly drawn to real asset strategies for their potential tax advantages. These potential advantages span a range of tax-saving measures, from end-of-year tax-saving strategies, such as bonus depreciation, to the deferral of capital gains through 1031 exchanges.
While real estate has traditionally been a go-to choice for real asset investors, farmland is emerging as an increasingly accessible alternative. By leveraging farmland’s unique tax advantages and capitalizing on the asset’s historically attractive returns, farmland can present an opportunity to generate strong after-tax returns that may be worth consideration in the year ahead.
One key avenue for potential tax savings in farmland investments is bonus depreciation. Bonus depreciation is a tax incentive that allows investors to accelerate the depreciation of certain qualifying capital investments or expenditures. This deduction can reduce taxable income for a specific tax year, presenting a unique year-end tax-saving strategy.
For farmland investors, this can translate into the ability to deduct a set amount of the purchase price of a property at the time of acquisition. Farmland property eligible for bonus depreciation includes existing long-lived assets, such as mature trees and/or vines planted at the property, as well as improvements made to the property, including farm buildings and structures, farm equipment, irrigation systems, capitalized development costs, and more.
Bonus depreciation is currently scheduled to be phased out entirely by 2027. Please consult your tax advisor for detailed information on how bonus depreciation may work for you and your tax situation.
1031 Exchanges in Farmland
Farmland, classified as a “like-kind” real property interest, is eligible for a 1031 exchange. Under Section 1031 of the US Internal Revenue Code, this exchange allows investors to reinvest the sale proceeds of an existing investment property into a similar real property interest to enable tax savings at the time of sale. “Like-kind” real property interests extend beyond farmland and may also include residential real estate properties, such as multi-family or apartment units, commercial real estate, such as office buildings, parking garages or warehouses, and other land use investments.
1031 exchanges can be a valuable tool for investors seeking to mitigate tax liabilities associated with property transactions. These exchanges may enable investors to defer recognition of certain capital gains, as well as defer depreciation recapture and other related federal income tax liabilities.
Investing in Farmland Through Self-Directed IRAs
In addition to the advantages offered by bonus depreciation and 1031 exchanges, investing in farmland through a Self-Directed Individual Retirement Account (SDIRA) can present another potential tax benefit. This strategy blends farmland’s historically attractive returns with the tax benefits inherent in retirement accounts.
An SDIRA is a type of traditional or Roth IRA, both designed to enable investors to benefit from tax-advantaged growth. Unlike traditional or Roth IRAs, however, which typically limit investment options to stocks, bonds, and other more traditional assets, an SDIRA provides investors with the flexibility to diversify their portfolio into alternative investments, including farmland.
It is important to note that SDIRAs require a specialized custodian for managing investments in assets, like farmland. These custodians handle the administrative duties necessary to maintain the IRA's tax-deferred status.
FarmTogether’s Strategic Edge
Investing in farmland can provide attractive opportunities for investors seeking both short-term tax savings strategies and long-term benefits. By taking advantage of these various potential tax benefits, investments in farmland can be an attractive way to maximize returns this filing season and the year ahead.
FarmTogether offers a diverse range of products that can help you achieve your tax-saving goals, whether you’re interested in a 1031 exchange or investing in farmland through one of our SDIRA partners. We offer Crowdfunded offerings, the FarmTogether Sustainable Farmland Fund LP, Bespoke offerings, and Tenancy in Common (TIC) that make it easier for individual investors, financial advisors, wealth managers, and family offices to seamlessly integrate farmland into their portfolios.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.
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