Q:
What is my farm worth?
A: Vacant land - Values are
determined just like most other real estate investments.
Location, demand, condition of property and the return
generated by the asset or CAP rate.
Farmland - Soil P.I. or
Productivity Index, which is established by the University of
Illinois, is a key factor for determining farmland
values. Location is always an important
detail.
Development or transitional land
- Values are determined by a combination of factors
Location is always the most important factor. Other
important considerations are availability of utilities such as
water and sewer, transportation such as highway access or
commuter rail. Your community usually has a
comprehensive plan for the surrounding area. The type of
use they foresee your property having will have a major impact
on land values.
Q: Can I somehow avoid paying Capital Gains tax
on a real estate sale?
A: Yes. There are two ways to avoid the
dreaded Capital Gains tax.
1. The first way is to
use a Tax Code 1031 Exchange.
2. The second and
the least desirable option is if you were to pass away. Your family gets the
stepped up basis or new value at the time of your death.
Inheritance or the "death tax" would then become
your tax burden.
Q: What is a “1031 exchange”?
A: The1031 Exchange is a way the federal
government has allowed you to postpone the payment of capital
taxes.
Q: What qualifies as an exchange?
A: The1031 Exchange rules say a trade is any
real estate for real estate as long as it is considered
investment real estate. For example, farmland for
farmland, farmland for an apartment building or apartment
building for land.
Q: How are Capital Gains figured?
A: If you sell your farmland to a developer
for $20, 000 per acre and your cost to purchase the property
is just $2,000 per acre, you could be subject to a Capital
Gain Tax of $18,000. Long term Capital Gain Taxes are
about 20% so your tax liability would be approximately $3, 600
per acre plus whatever state tax would apply. These are
general figures not to be used as actual amounts. Please
consult your accountant and a good real estate attorney for
specific figures.
Q: Where is the best farmland?
A: Quality farmland is found in many locations
across the Midwest. There is no one best location.
Illinois is blessed with millions of acres of prime
agricultural soils.
Q: What types of leases are
available?
A: There are many lease versions available to
land owners.
1. 50/50 - This
is the basic form of a farmland lease. Owner and tenant
split the cost of seed, fertilizer and chemicals. Tenant
provides labor and machinery. The income produced is
split equally. Equal risk to both owner and tenant.
2. Cash Rent -
Tenant provides land owner a specific amount of income, which
is usually paid in two installments. Less risk to owner.
3. Custom Farm Lease
- Land owner hires local farmers to do specific jobs related
to planting and harvesting a crop. Higher risk to land
owner.
4. Modified Lease
- Based on a formula for commodity prices and crop yield
adjustments.
Q:
Will I have trouble renting
the farmland?
A: One of the best things about a farmland
investment is a 0% vacancy rate. There are high quality
farm operators always looking to add acres to their operation.
Q: What makes a parcel of land
worth $20,000/acre or more?
A: Location, location, location! Access
to sewer and water as well as transportation
availability.
Q: What is the price range for
farmland?
A: Values can range from $1,000/Acre for
timber, pasture and crop land to $4,500/Acre for high quality
farmland with improvements.
Q: What kind of returns can I
expect?
A: Farmland returns vary a great deal
depending on your specific farm and the type of farm
lease. The general range before real estate taxes is
between 3.5% - 6.0%.
E-Mail us with your land questions at: mark@bigfarms.com
