Business and Financial
Second marriages present unique challenges for farm transition planning. This is especially true when the second marriage occurs later in life and the spouses have accrued significant assets and/or have children from prior marriages. The spouses in a second marriage obviously want to help provide for each other but may have a competing interest of providing for their children but not necessarily stepchildren. Without good planning, it is possible that farm assets will end up with a spouse or stepchildren who were not involved in the farming operation.
Farm Transition Planning Strategies for Second Marriages, a new bulletin available at farmoffice.osu.edu, addresses the two most common sources of risk to farming operations when a second marriage is involved – death and divorce. While these risks cannot be eliminated, there are strategies to help minimize the risks to ensure, as best we can, that farm assets stay with the farm family. The bulletin discusses the strategies and how they can be integrated into a farm transition plan.
Strategies to protect farms from the death of a second spouse mostly involves incorporating a trust in the farm transition plan. A trust can hold assets for the surviving spouse without giving legal ownership to the spouse. The trust serves the dual purpose of providing income and other resources for the surviving spouse while also protecting those assets to ultimately be inherited by the deceased spouse’s heirs. Trusts are an excellent tool to both provide for spouses and protect assets for future generations.
Prenuptial and postnuptial agreements can be used to reduce the risks of divorce. These agreements between spouses specifically identify which assets are considered joint, marital assets and which assets are to be considered outside of the marriage. These designations can help safeguard farm assets by keeping them immune from a division of assets in a divorce. A recent change in the law allows spouses to enter into such an agreement even after the marriage has occurred.
Any farmers who are in a second marriage should consider including a trust and/or pre/postnuptial agreement into their farm transition plan. An attorney experienced in farm transition planning can assist with deciding if a trust or marriage agreement is needed and how best to integrate into a farm transition plan. The Farm Transition Planning Strategies for Second Marriages bulletin provides a detailed discussion of trusts and marriage agreements and their potential impact on farm transition planning.
Tags: second marriages, farm transition planning
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The State of Arkansas made history last month when it took steps to enforce its new law restricting foreign ownership of land in the state. Arkansas ordered Northrup King Seed Co., a subsidiary of Syngenta held by China-owned company ChemChina, to give up 160 acres of Arkansas farmland it owned. The State also assessed a $280,000 fine against Syngenta for failing to disclose the land ownership. The actions are the result of a new foreign ownership law enacted by the Arkansas legislature earlier this year.
Joining Arkansas and ten other states, Ohio also passed a law restricting foreign ownership of land earlier in 2023. Ohio’s new “Save our Farmland and Protect our National Security Act” quietly became effective last month. The law limits who can own agricultural land in the state and requires persons or entities who cannot own Ohio farmland to forfeit title to the property, which the State will then sell. The purpose of the law, according to the legislature, is “to recognize that Ohio has substantial and compelling interests in protecting its agricultural production.”
Who the law restricts from owning agricultural land in Ohio
The law is not an absolute restriction on foreign ownership of land. Instead, the law prohibits agricultural land ownership by any “person” listed on a registry compiled by Ohio’s Secretary of State. A “person” can include an individual, firm, company, trust, business or commercial entity, organization, joint venture, non-profit, or non-U.S. government. The prohibition applies not just to the person listed on the registry, but also to any agent, trustee, or fiduciary of the person.
The Ohio Secretary of State must compile the “registry” by identifying and including any person that constitutes a threat to the agricultural production of the state. To develop the registry, the Secretary of State must consult several federal sources, including the list of foreign adversaries, terrorist exclusion list, list of countries that have provided support for acts of international terrorism, and persons designated by two presidential Executive Orders. In accordance with the law, Ohio’s Secretary of State has compiled the registry and published it online at https://www.ohiosos.gov/publicintegrity/save-our-farmland/.
Exceptions to the ownership restrictions
The ownership restriction does not apply to any agricultural land a person acquired before the act’s effective date of October 3, 2023. There is also a limited exception that applies when a person on the registry recieves the land through inheritance, a gift, collection of a debt, a foreclosure, or enforcement of a lien on or after the law's effective date. In those cases, the person can recieve the land but must divest itself of the title and any interest in the land within two years of receiving it. And while holding the land until divestiture, the person cannot use it for any purpose other than agriculture or lease it to any person on the registry.
Enforcement of the law
Enforcement involves both the Secretary of State and the Ohio Attorney General. If the Secretary of State finds that a person listed on the registry has acquired title or an interest in land in violation of the law, the Secretary of State must report the violation to the Attorney General. Others can report land ownership by a person on the registry via the Secretary of State’s web page for the registry, https://www.ohiosos.gov/publicintegrity/save-our-farmland/.
Upon learning of the violation, the Attorney General must initiate a legal action in the county where the land is located. If the court agrees that the ownership violates the law, it shall file an order allowing the state to take ownership of the land and ordering the land to be sold at public auction, following required legal procedures. Proceeds from the sale are to be applied first to any court costs and expenses, then to the registered person. That amount is limited, however, to the actual cost paid by the registered person for the land. If any sale proceeds remain, the funds are to be paid to the general fund of each county where the land is located, proportionate to the acreage in the county.
Learn more on our next Farm Office Live!
Join us on our next Farm Office Live webinar as we discuss Ohio’s new foreign ownership law and talk with Micah Brown, staff attorney with the National Agricultural Law Center, about foreign ownership restrictions in the U.S. and what they mean for agriculture. The Farm Office team will also cover Using Charitable Remainder Trusts, Ohio’s Role in Organic Grain Production, Farm Business Analysis Update, and Farmer Mental Health Concerns and Resources. Farm Office Live takes place on November 17 at 10 a.m.-- registration is necessary at https://farmoffice.osu.edu/farmofficelive.
Read the primary provisions of Ohio’s Save Our Farmland and Protect Our National Security Act in Ohio Revised Code Section 5301.256. The Ohio Legislature enacted the law in House Bill 33, the biennial budget bill.
Tags: foreign land ownership, save our farmland and protect our national security act, foreign land restriction
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One of the primary challenges for a retiring farmer is the large tax burden that retirement may cause. Throughout their farming careers, farmers do a good job of managing income taxes, in part, by delaying sales and prepaying expenses. This strategy works well while the farm is operating but can cause significant tax liability upon retirement. The combination of a large increase in revenue from the sale of assets and little or no expenses to offset the revenue can cause a retiring farmer to be pushed into high tax brackets. It is not unusual for 40% or more of the sale proceeds from a retirement sale to go to taxes. One strategy to reduce income tax liability at retirement is a Charitable Remainder Trust (CRT). A CRT can be an effective way of managing income taxes at retirement, but it is not for everyone.
A CRT is a charitable trust because at least some of the assets in the CRT must eventually pass to a qualified U.S. charitable organization such as a church or 501(c)(3) corporation. This charitable nature of the CRT is central to the CRT strategy. As a charitable trust, the CRT may sell assets without paying tax on the sale. So, instead of the retiring farmer selling assets in their own name, they donate the assets to the CRT and then the CRT sells the assets. The retiring farmer then receives an income stream from the CRT. After a period of time, the income stream stops and the remaining trust assets are contributed to the named charity. The following are the steps of the CRT strategy:
- Assemble a team of advisors and develop a CRT strategy.
- Donor establishes a CRT. The trust document declares the income beneficiaries and the charitable beneficiaries.
- Donor determines the assets to be contributed to the CRT.
- Donor contributes assets into the CRT, typically grain, machinery and/or livestock.
- The CRT sells the assets but does not pay tax.
- The Trustee of the CRT uses the sale proceeds to establish an annuity. The annuity must be designed to provide at least 10% of the sale proceeds to the charity.
- The annuity pays out to the Donor over a number of years. The Donor pays income tax on the annuity distributions.
- When the trust is terminated, the charity is paid the remaining assets.
Consider the following example to help further explain how a CRT strategy works:
Farmer decides to retire at the end of the 2023 crop year. After harvesting the 2023 crop, Farmer owns $1 million of grain and $1.5 million of farm equipment. Farmer’s accountant tells him that if he sells all the grain and machinery in one year, he will pay around $1 million in taxes. Farmer decides to implement the CRT strategy. He establishes a CRT and names himself and his spouse as the income beneficiaries and the local children’s hospital as the charitable beneficiary. Farmer transfers his grain and machinery into the CRT. The CRT sells the grain and machinery and receives $2.5 million in sale proceeds.
The CRT establishes an annuity that will pay out $125,000 for the next 20 years. Farmer pays income tax on each $125,000 payment which results in $20,000 of annual income taxes. After 20 years, the trust is terminated, and the children’s hospital receives the remaining funds in the CRT.
As the example shows, the strategy avoids a large, up-front tax payment in the year of the asset sale. Farmer pays taxes on each annual $125,000 payment which allows him to stay in a lower tax bracket. In the example, instead of paying $1 million in taxes in 2023, Farmer spreads the payments out and ultimately pays $400,000 over 20 years.
The primary disadvantage of a CRT is that it is an irrevocable trust. Once the CRT is set into motion, it cannot generally be undone. A CRT may not be the best option for farmers who wish to keep flexibility with managing their assets or who are transitioning the farming operation to family members. While a CRT provides many tax and business benefits, it is not an adaptable plan that can be changed in the future.
Another disadvantage of a CRT is the cost. It is usually a rather complicated process to establish the trust, calculate the potential tax savings, file a tax return, and establish an annuity. Legal and other professional fees will often be tens of thousands of dollars. It is important early in the planning process to weigh the potential tax savings against the cost of establishing the CRT.
For more information on CRTs, see the newly published bulletin Charitable Remainder Trusts as a Retirement Strategy for Farmers available at farmoffice.osu.edu. This bulleting provides details on how a CRT strategy is implemented and its advantages and disadvantages. Be sure to consult with an attorney, tax advisor and financial advisor before deciding on a CRT for your retirement strategy.
Tags: retirement, Estate Planning, farm transition planning, charitable remainder trust, trust, CRT
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Agricultural & Natural Resources Income Tax Issues Webinar
Barry Ward, Director, Income Tax Schools at The Ohio State University
Jeff Lewis, Income Tax Schools at The Ohio State University
Tax practitioners, farmers, and farmland owners are encouraged to connect to the Agricultural and Natural Resources Income Tax Issues Webinar (via Zoom) on December 13 from 8:45 a.m. to 3:20 p.m. The event is sponsored by Income Tax Schools at The Ohio State University.
The webinar focuses on issues specific to farm tax returns related to agriculture and natural resources and will highlight timely topics and new regulations.
The program is an intermediate-level course for tax preparers whose clients include farmers and rural landowners. Farmers who prepare and file their own taxes will also benefit from the webinar.
Tentative topics to be covered during the Ag Tax Issues webinar include:
- Timely Tax Issues Facing Agricultural Producers
- Employee vs Independent Contractor
- Cost-Sharing Exclusion
- Farm Trade or Business
- Farming S Corporations
- Timber Taxation
- Legislative and Regulatory Update
- Form 1099s Requirements for Farmers and Ranchers
- Tax Schemes Targeting the Farm
- Tax Issues Arriving at the Death of a Farmer
- Ohio Tax Update
Other chapters included in the workbook not included in the webinar includes: Material Participation Rules for Farmers, Ranchers and Landowners, Livestock Tax Issues, Depreciating and Expensing Farm Assets, Sale and Exchange of Farm Property, Sample Tax Return.
The cost for the one-day school is $180 if registered by November 29th. After November 29th, the registration increases to $230. Additionally, the course has been approved for the following continuing education credits:
• Accountancy Board of Ohio, CPAs (6 hours)
• Office of Professional Responsibility, IRS (6 hours)
• Supreme Court of Ohio, Attorneys (5 hours)
Registration includes the Agricultural Tax Issues Workbook. Early registration (at least two weeks prior to the webinar) guarantees that you’ll receive a workbook prior to the webinar.
The live webinar will also feature options for interaction and the ability to ask questions about the presented material.
More information on the workshop, including how to register, can be found at: https://farmoffice.osu.edu/tax/2023-ag-tax-issues-webinar
Contact Barry Ward at ward.8@osu.edu or Jeff Lewis at lewis.1459@osu.edu
Tags: tax, Ag Tax, Farm Tax, labor law, tax law, Farm Business
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An agricultural easement is a legal instrument that can protect farmland from non-farm development and preserve the legacy of family land for the future. An earlier blog post explains how an agricultural easement works and answers common questions about agricultural easements. As we explained, an agricultural easement not only preserves farmland but can also be a valuable financial and tax tool that can enable a transition of the farm to the next generation. But are there drawbacks to agricultural easements? Here's a summary of potential negative implications of easements that landowners should also consider.
It's difficult to forecast the future of a farm. The very nature of the easement requires a best estimate of how the farmland might be used for agriculture into the future--a challenging task. The Deed of Agricultural Easement the parties agree to must predict agricultural activities that are consistent with the easement and those that would violate the easement. There could be future problems if the predictions and forecasting aren’t flexible enough to accommodate agriculture in the future.
The “perpetuity” requirement. While it’s possible to draft an easement that lasts only for a certain term of years, most agricultural easements remain on the land “in perpetuity,” or permanently. The programs that pay a landowner to grant an agricultural easement and the federal income and estate tax benefits for donating all or part of an easement require that the easement is perpetual. This differs from the conservation programs we’re accustomed to in agriculture that require shorter term commitments, and it can be a deterrent to a landowner who wants future generations to have a say in what happens to the land. These concerns might be addressed in the deed of agricultural easement, however, which may provide sufficient flexibility to address those future concerns.
Termination can be difficult and costly. Hand in hand with the perpetuity issue is the difficulty of terminating an agricultural easement once it’s in place. Typically, both parties must agree on a termination and a court of law must determine that conditions on or surrounding the land make it impossible or impractical to continue to use the land for agricultural purposes. Attempts to terminate without following the stated procedures can result in penalties for the current landowner. If there was a payment for the agricultural easement, a deed of easement will likely require the landowner to reimburse the paying party for the proportionate share of the fair market value of the land with the easement removed and will also require the party receiving the reimbursement to use the funds only for similar conservation purposes.
Eminent domain can be an issue. As one Ohio farm family has learned, an agricultural easement might not protect the farmland from an eminent domain proceeding. In Columbia Gas v. Bailey, 2023-Ohio-1245, the Bailey family was forced to litigate an attempt by Columbia Gas to use eminent domain for the construction of a gas pipeline across their farmland. Their predecessor had placed an agricultural easement on the farmland in 2003, and the family argued the easement prevented the taking of land for the pipeline under the doctrine of “prior public use.” That doctrine prohibits an eminent domain action that would destroy a prior public use. The court agreed that the agricultural easement did create a prior public use on the land, and the court shifted the burden to Columbia Gas to prove that the pipeline would not destroy the established prior public use. Rather than doing so, Columbia Gas withdrew its eminent domain proceeding and moved the location of the pipeline. The court's decision to recognize an agricultural easement as a prior public use might provide some protection from eminent domain for future owners of agricultural easement land but, like the Baileys, landowners may have to fight a long, expensive battle to prove that an eminent domain action would destroy an established prior public use.
Lenders and other interests must be on board. A landowner must deal with any existing mortgages, liens, leases, or easements on the farmland before entering into an agricultural easement. The State of Ohio’s agricultural easement, for example, requires a lender to subordinate a mortgage to the rights of the easement holder. Renegotiation of the mortgage might be necessary, and the lender might require a paydown of the outstanding mortgage if the property’s value could reduce below that amount. Without subordination and other approvals, a landowner will not be able to enter into an agricultural easement.
Local governments must be on board. Ohio’s program for purchasing agricultural easements requires a landowner to submit a resolution of support from the township and county where the land is located. This means the local governments must agree that committing the land to agriculture is consistent with local land use plans. An early conversation with local officials is necessary to ensuring consistency with the community’s future plans.
There will be monitoring. An easement holder has the responsibility of ensuring there is not a violation of the easement or conversion of the land to non-agricultural uses. This means there will be a baseline or “present condition” report of the easement property upon easement creation and monitoring of the property “in perpetuity.” An annual visit to the property and completion of an annual monitoring report by the easement holder is common.
It's a lengthy process. Agricultural easements don’t pop up overnight. Especially when applying for funding from competitive programs like Ohio’s Local Agricultural Easement Purchase Program or the NRCS Agricultural Land Easements Program, it can be a year or more before an agricultural easement is in place.
Planning and integration with plans is necessary. An agricultural easement is one piece of what can be a complex plan addressing a landowner’s expansion, retirement, estate, and transition needs. A landowner would be wise to work with a team of professionals—financial planner, tax professional, attorney—to ensure that an agricultural easement integrates with all other parts of the plan.
Still interested? Ohio landowners interested in learning more about agricultural easements may want to consider these steps:
- Review the resources on the Ohio Department of Agriculture’s Office of Farmland Preservation.
- Talk with other landowners who have entered into easements. Refer to the Coalition of Ohio Land Trusts landowner resources and landowner stories.
- Visit American Farmland Trust’s Farmland Information Center.
- Talk with a “local sponsor” or land trust in your area. The Office of Farmland Preservation provides a list of local sponsors for the Clean Ohio Agricultural Easement Purchase Program on its website.
- Talk with your attorney, financial planner, and accountant about the implications of entering into an agricultural easement.
In the previous post “Artificial Intelligence – What Is it and How to Use It” (May 31, 2023), I briefly discussed AI, how it works and some of its potential uses. There is no doubt that AI will have profound effects on each of us and our society in general. In this post, I am going to examine how AI works for a specific task related to agricultural law and measure its performance.
Surveys by Ohio State University indicate around 50% of farmland in Ohio is leased. Therefore, farm leases are an important legal document for many Ohio farmers. While some farm leases are still only verbal, many tenants and landowners recognize the benefits of a written lease and have at least a basic written lease in place. Some leases are written by the tenant or landlord while other leases are written by attorneys. The issue addressed in this article is: is AI ready to draft your farm lease?
The Process
To address the above question, ChatGPT and Google Bard, two of the more prominent AI interfaces, were each tasked with the following: “draft a cash farm lease”. This command was broad and vague but would likely reflect what a tenant or landowner might request. This exercise was performed on May 30, 2023 and each AI tool provided a cash farm lease. The exercise was again performed on October 4, 2023 to assess if AI’s capabilities changed over time.
To measure the effectiveness of AI, the drafted leases were compared to the recommended lease terms provided in OSU Extension’s bulletin “What’s In your Farm Lease? A Checklist of Farm Lease Provisions”. This bulletin was written by Peggy Hall and provides 26 key terms that should be included in most farm leases. Each draft lease was scored based on the number of terms that were included.
The Results
The following is the score for each draft, with the score reflecting the number of recommended terms from the lease bulletin that were included in the lease drafts:
ChatGPT, May 2023 8
Google Bard, May 2023 10
Chat GPT, October 2023 9
Google Bard, October 2023 7
As the scores show, neither ChatGPT nor Google Bard included even one-half of the recommended terms and the best was 10 out of 26 or 38%. Two important items of note. First, no drafts included terms to prevent the tenant from assigning the lease to someone else – an extremely important provision to include in farm leases. Second, no drafts addressed landowner or tenant signatures needing notarized.1
I would describe these drafts as “bare minimum” leases. They are probably better than having no lease at all, but they could be much better and do not include several key terms. Also, there was no significant improvement of performance over time. In fact, the Google Bard score was lower in the later draft. Asking ChatGPT or Google Bard to “draft a farm cash lease” is not going to provide a satisfactory lease.
Providing Input to AI to Improve Output
As I discussed in my prior AI post, one of the benefits of AI is the ability to chat with it. That is, you can provide feedback to the AI to assist it in providing a better outcome. So, that’s what I did. After reviewing the first two rounds of lease drafts, I asked ChatGPT and Google Bard to draft a third cash farm lease and to specifically include the 26 recommended terms from the lease bulletin. The resulting leases were better and scored as follows:
ChatGPT 16
Google Bard 20
As you can see, the scores increased significantly. So, the feedback provided to AI was integrated into the resulting drafts and made the leases better. This is one of the major advancements of AI. It allows someone like me that has little computer proficiency to provide untrained input that causes a significantly better result.
While the scores did increase, there were still some major issues with the drafts. I was probably generous in the scoring and gave credit if an issue was addressed, even if somewhat incomplete. For example, in its first two drafts, ChatGPT did not include a term addressing who receives FSA payments, the tenant or landowner. ChatGPT did address this issue after being prompted but stated that the landowner would receive all FSA payments. According to FSA rules, the tenant must receive at least some of the program payments and it is customary for the tenant to receive all FSA payments. So, while ChatGPT included a term about FSA payments, the included term was not completely accurate or correct.
Google Bard also had similar issues. In its first two drafts, it did not address what happens in the event of eminent domain takes a portion of the leased property. A typical lease term would say that the tenant is compensated for any crop damage caused by eminent domain and the landowner would keep the acquisition proceeds. Google Bard included a provision about eminent domain but stated the tenant would receive all eminent domain proceeds. Allowing the tenant to keep eminent domain proceeds would be very unusual and not something a landowner should agree to.
I would assess these leases as “better but still not good”. These drafts did include more of the recommended terms but included many of them in an insufficient or incomplete manner. The third round of leases did show that AI can learn and improve with feedback but also that it has a long way to go. The craft and nuance of drafting legal documents still seems to belong to the domain of people.
Conclusion
There are some well-known people, such as Elon Musk, who claim that we should have serious concerns about AI eventually taking over the world. Their concerns may be valid, but as of now I don’t believe AI is going to take over farm lease drafting anytime soon. An experienced attorney can do a much better job of drafting a farm lease than today’s AI. For a tenant or landowner who are unwilling to hire an attorney or may not have the resources to pay an attorney, a farm lease drafted by AI may be better than nothing but that’s about it. The best source of legal services remains to be attorneys and likely will be for the foreseeable future. AI is not ready to replace your attorney – yet.
1Leases for more than three years must be notarized.
By Wm. Bruce Clevenger, Frank Becker, Shelby Tedrow, Grant Davis, and Ken Ford
Ag lenders are keeping farm businesses moving forward. Agriculture is a capital intense industry. Land, buildings, livestock, and equipment are the largest assets on the balance sheet. Additionally, the cash flow needs of seed, chemicals, fertilizers, feed, and supplies are cumulative to the number of dollars needed to operate the business.
Ohio State University Extension has scheduled four seminars in Ohio for Agricultural Lenders. The dates are Tuesday, October 17th in Ottawa, Ohio; Wednesday, October 18th in Wooster, Ohio; Thursday, October 19th in both Washington Court House, OH, and Urbana, OH. Registration deadlines are October 10, 11 and 12, for Ottawa, Wooster, and Washington Court House/Urbana, respectively.
These seminars are excellent professional development opportunities for Lenders, Farm Service Agency personnel, county Extension Educators and others to learn about critical agricultural topics facing the industry across the state and nation such as farm policy, risk management, market outlook, and business analysis.
Featured topic and speaker at all locations in 2023…
Farm Bill 2023 Update: Direct from Washington D.C. by: John Newton, Ph.D., Chief Economist to Senator John Boozman, Ranking Member of the U.S. Senate Committee on Agriculture, Nutrition & Forestry. Newton: Ohio State University Graduate: Ph.D 2013, M.S. 2012, B.S. 2010.
2023 Topics and Speakers by Location
Ottawa, OH – October 17, 2023
- Economics of Farm Drainage: Calculating a Payback Period & Lease Terms When Installing Drainage Improvements. – Wm. Bruce Clevenger, OSU Extension Field Specialist, Farm Management
- Farm Bill 2023 Update: Direct from Washington D.C. – John Newton, Ph.D., Chief Economist to Senator John Boozman
- Farm Insurance Policy: “I think I’m covered if that happens” – Robert Moore, J.D., OSU Extension Attorney, OSU Ag & Natural Resources Law Program
- USDA – Farm Service Agency Loan Program Update – Kurt Leber, Northwest Ohio FSA, District Director – Farm Loan and Farm Program
- Commodity Grain Markets: Trends and Prospects – Seungki Lee, Ph.D., Ohio State University, Dept of Ag, Environ, & Development Economics.
- Farm Business Analysis and Benchmarking Program – Clint Schroeder, OSU Extension, Program Manager
- Economic View from the Farmgate: Land, Inputs, Margins & Tax Policy – Barry Ward, OSU Extension, Leader, Production Business Management
Wooster, OH – October 18, 2023
- Tools for Farmland Preservation – Tate Emerson, Killbuck Watershed Land Trust
- Financing Food and Agriculture – Shoshana Inwood, OSU Community, Food, and Economics Development & Jessica Eikleberry, Farmland Preservation Specialist – Wayne County Planning Office
- Farm Bill 2023 Update: Direct from Washington D.C. – John Newton, Ph.D., Chief Economist to Senator John Boozman
- Dairy Market Outlook and Industry Updates – Jason Hartschuh, OSU Extension Field Specialist, Dairy
- Economic View from the Farmgate: Land, Inputs, Margins & Tax Policy – Barry Ward, OSU Extension, Leader, Production Business Management
- Farm Insurance Policy: “I think I’m covered if that happens” – Robert Moore, J.D., OSU Extension Attorney, OSU Ag & Natural Resources Law Program
Urbana, OH – October 19, 2023
- Economic View from the Farmgate: Land, Inputs, Margins & Tax Policy – Barry Ward, OSU Extension, Leader, Production Business Management
- Farm Bill 2023 Update: Direct from Washington D.C. – John Newton, Ph.D., Chief Economist to Senator John Boozman
- FarmOn and On Farm Records – Bruce Clevenger, OSU Extension, Field Specialist – Farm Management
- Livestock Outlook and Update – Garth Ruff, OSU Extension, Field Specialist – Beef Cattle
- Commodity Grain Markets: Trends and Prospects – Seungki Lee, Ph.D., Ohio State University, Dept of Ag, Environ, & Development Economics
Washington Court House, OH – October 19, 2023
- Livestock Outlook and Update – Garth Ruff, OSU Extension, Field Specialist – Beef Cattle
- Farm Bill 2023 Update: Direct from Washington D.C. – John Newton, Ph.D., Chief Economist to Senator John Boozman
- Commodity Grain Markets: Trends and Prospects – Seungki Lee, Ph.D., Ohio State University, Dept of Ag, Environ, & Development Economics.
- Economic View from the Farmgate: Land, Inputs, Margins & Tax Policy – Barry Ward, OSU Extension, Leader, Production Business Management
- FarmOn and On Farm Records – Bruce Clevenger, OSU Extension, Field Specialist – Farm Management
The registration cost to attend one of the Ag Lender Seminars is $75.00 per guest. Payments can be made by credit card online or mail a check. Registration is open online at: https://u.osu.edu/aglenderseminars/
Registration questions can be directed to Wm. Bruce Clevenger, OSU Extension Field Specialist, Farm Management, at 419-770-6137 or clevenger.10@osu.edu
OSU Extension conducts the seminars from input from Ag Lenders, County Extension Educators and Extension Specialists. The seminars are designed to provide information that Ag Lenders will use directly with their customers, indirectly within the lending industry, and as professional development for current issues and trends in production agriculture. OSU Extension has been offering Ag Lenders Seminars for over 40 years.
Tags: Ag Lender Seminar, Insurance, Farm Records, tax, Beginning Farmer Tax Credit, farm bill
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We know farms are subject to more risks than ever before and we know the important role insurance plays in protecting our farm assets. But how many of us actually read and understand our farm insurance policies? The failure to read a policy is probably not due to apathy but is more likely due to the complex nature of an insurance policy. Reading and understanding an insurance policy is difficult for anyone other than those in the insurance industry. But it's a critical necessity for farm risk management.
Our newest publication can help. Farm Insurance: Covering Your Assets provides a general description of farm insurance and insurance policies. This information will help a farmer understand how farm insurance coverage works. Our goal with this publication is to prepare farmers for a review of policy provisions with their insurance agents and ensure the farm has a comprehensive and carefully tailored insurance policy. We've coupled the publication with a new law bulletin, Farm Liability Insurance: Examining Your Covered Activities and Assets, which provides a quick reference list of farm activities and assets that might not be covered in a standard farm liability insurance policy.
Robert Moore, attorney with the OSU Agricultural & Resource Law Program, authored the publication with the assistance of Jeff Lewis, attorney with OSU's Income Tax Schools, and Zachary Ishee and Samantha Capaldi, National Agricultural Law Center Law Fellows. The National Agricultural Law Center and the USDA National Agriculture Library provided funding for the project in partnership with OSU Extension. Find the new publications in our Business Law Library on Farm Office at https://farmoffice.osu.edu/law-library/business-law.
Tags: farm insurance, Insurance, liability, risk management
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The term “Land Contract” is often used as a generic name for any land installment sale where the buyer makes payments to the seller over time. However, a land contract has a specific meaning under the law and does not apply to all installment sales. A land contract is one type of land installment sale while seller-financed is another. While the land contract and seller-financed option allow buyers to acquire property without traditional bank financing, they differ significantly in terms of legal implications and practical considerations. In this article, we will discuss the difference between a land contract installment sale and a seller-financed installment sale.
Land Contracts: An Overview
A land contract is a legal agreement between a property seller and a buyer. In this arrangement, the buyer agrees to purchase the property over time by making regular payments to the seller, who retains legal title to the property until the contract is fully paid off. After the final payment is made, the seller signs the deed over to the buyer. Land contracts are a popular choice for buyers who may not qualify for traditional financing due to credit issues or other reasons.
Key Characteristics of Land Contracts in Ohio:
Legal Title: In Ohio, the seller retains legal title to the property until the contract is satisfied, while the buyer obtains equitable title, allowing them to possess and use the property.
Payment Structure: Buyers make monthly or annual payments to the seller, including principal, interest, and sometimes taxes and insurance. The specific terms are negotiable and outlined in the contract.
Default Consequences: If the buyer defaults on payments and the contract has been in effect for less than five years or less than 20% of the payment has been made, the seller can terminate the contract and retake possession of the property. If the contract is older than five years or more than 20% of the purchase price has been paid, the seller must foreclose and will be paid from the proceeds of a judicial sale.
Legal Requirements: Ohio Revised Code Section 5313.02 requires sixteen specific requirements for a land contract. If entering a land contract, be sure all requirements are met so that the land contract is enforceable for both buyer and seller.
Seller-Financed Land Sales: An Overview
Seller-financed land sales involve the property seller acting as the lender, providing financing to the buyer for the purchase. Legal title to the property is transferred to the buyer at the time of sale. This method allows buyers to acquire the property without the need for a traditional bank loan.
Key Characteristics of Seller-Financed Land Sales in Ohio:
Title Transfer: Unlike land contracts, seller-financed land sales typically involve the immediate transfer of both legal and equitable title to the buyer upon the completion of the sale.
Payment Structure: Buyers make regular payments to the seller, which include principal and interest, similar to a traditional mortgage. These terms are negotiated between the parties and documented in a promissory note and mortgage. The mortgage provides security to the seller in the event the buyer defaults.
Default Consequences: If the buyer defaults on payments, the seller can initiate a foreclosure proceeding, similar to traditional lenders, to ensure payment is made.
Legal Requirements: There are no specific legal requirements for a seller-finance sale. However, a promissory note should be provided to the seller that includes the amount owed, interest rate and payment schedule. A mortgage should also be executed and recorded to provide security to the seller in the event of buyer’s default.
Key Considerations
Title Transfer: The most significant difference between land contracts and seller-financed land sales in Ohio is the timing of title transfer. In a land contract, the seller retains legal title until the contract is fully satisfied, while in seller-financed land sales, both legal and equitable title transfer to the buyer upon sale completion.
Negotiability: Both methods offer flexibility in negotiating terms, including interest rates, down payments, and property responsibilities. Buyers and sellers should carefully consider and document these terms to avoid future disputes.
Legal Assistance: Given the complexities of real estate transactions, it is advisable for both buyers and sellers to seek legal counsel to ensure that the chosen method aligns with their interests and complies with Ohio law.
Which is Better?
It depends. For the seller, a land contract is often better because the deed is not transferred until the final payment is made. This allows the seller to keep legal title and potentially have more protection if the buyer defaults. For the buyer, the seller-financed option is usually better. The seller will prefer to have the legal title throughout the transaction so that they have full control over the property. Tax consequences are similar for both a land contract and seller-financed sale.
Conclusion
When it comes to land transactions in Ohio, understanding the difference between land contracts and seller-financed land sales is crucial. These methods provide alternatives to traditional financing, but they come with distinct legal and practical implications. Buyers and sellers should carefully evaluate their options, negotiate terms diligently, and consider consulting legal professionals to ensure a smooth and legally compliant transaction. Ultimately, a well-informed decision can lead to a successful and mutually beneficial real estate transaction.
Your residence is one of the few assets that can be sold for a gain without creating tax liability. The IRS rules allow $250,000/person of gain from the sale of a residence to be excluded from income. This rule is why most people do not need to worry about capital gains taxes when they sell one residence to buy another. This exception to capital gains taxes is important when considering business structures for the farming operation and when buying/selling a farm with a residence.
To qualify for the $250,000 residence exemption, the residence being sold must have been owned and used as the primary residence for two of the last five years. Houses that have not been used as the residence or that were acquired through a like-kind exchange are not eligible. For married couples, each spouse is eligible for the $250,000 deduction for a total of $500,000.
Consider the following example:
Andy and Betty purchased a house in 2000 for $200,000. They used the house as their residence until 2023 when they sold it and moved into a retirement community. The sale price for their house as $500,000. Assuming they otherwise qualify, there will be no tax on the sale of the house. The transaction creates a $300,000 gain but Andy and Betty may reduce their income by $300,000 to match the gain. Therefore, there is effectively no tax on the gain and Andy and Betty will receive the entire $500,000 sale price free of capital gain taxes.
The residence exemption has many implications but for farm families two come to the forefront. The first involves the sale of a farm that includes the residence. The $250,000 exemption only applies to the residential “curtilage” – the land immediately surrounding the residence and any closely associates buildings or structures. Generally, this means that the residence can include a lawn area, garage, storage shed and similar structures. The exemption does not apply acreage adjacent to the residence that is used to grow crops.
When selling a farm with the residence, the sale price should be allocated between the residence and farmland. As much of the sale price as can be legitimately justified should be allocated to the residence because this amount, up to $250,000, will not be taxed. Again, the allocation should be consistent with the true value of the residence.
Consider the following example:
Carl and Diane decide to sell their 80-acre farm for $1,000,000. The farm includes their residence and 80 acres. When negotiating with the buyer, they agree to allocate $300,000 of the sale price to the residence and 1 acre and $700,000 to the 79 acres used as farmland. Provided the residence otherwise qualifies, the $300,000 will not be taxed but the $700,000 will likely have capital gain taxes.
Carl and Diane may be tempted to try to use their entire $500,000 exemption on the sale. They should only take the entire exemption if they can justify valuing the residence and curtilage at $500,000. An appraisal may be appropriate if using the maximum exemption. Also, Carl and Diane cannot include 20 acres of the farmland with the residence to justify using a $500,000 value. Any part of the 80 acres that is used to plant crops will not be considered part of the curtilage and will not be eligible for the residential exemption.
Another situation where the residential exemption may arise involves establishing land LLCs. Many farm operations have an LLC or other business entity to hold the farmland and/or farm facilities. Land LLCs provide many benefits including liability protection and preventing land transfers outside of the family. The issue that arises with land LLCs is that LLCs do not live in homes so are not eligible for the residence deduction. That is, only people can receive the residence deduction, not business entities.
A farmer’s residence is often part of a larger parcel that includes farmland and/or farm facilities. Before transferring the parcel with the residence to an LLC, careful consideration should be made as to the implications to the residence tax exemption. In some cases, the residence should be surveyed off and remain owned by the original owners. In other cases, it may not be feasible to survey the residence from the farm and/or it may be very unlikely that the residence is ever sold. The decision to transfer or not transfer the residence to an LLC should be made on a case-by-case basis.
Consider the following example:
Earl and Fran own 500 acres of farmland. As part of their farm succession planning, they decide to transfer their land to an LLC. The 500 acres include their residence and their “home base” – shop, bins and other buildings used in the farming operation. Their residence sits in the middle of home base and would not be feasible to survey it from the rest of the farm. Also, Earl and Fran are unlikely to ever sell the residence because their children will be taking over the farm and the residence is likely to stay within the family for at least another generation.
In this situation, Earl and Fran decide to transfer their residence to the LLC. They will lose the residential exemption but because it is not feasible to survey off and they are unlikely to ever sell the residence, they are willing to forgo the exemption.
Let’s change the scenario a bit to see how the residential exemption can be preserved. Earl and Fran’s residence is located in the corner of a parcel away from home base. Before Earl and Fran transfer the land to an LLC, they survey off their residence and one acre. They keep the residence and one acre in their name and transfer the remaining 499 acres to the LLC.
In this scenario, Earl and Fran have preserved the residential exemption. If they sell their home in the future, they will be eligible to deduct up to $500,000 of gain. The extra cost of a survey is worth preserving the exemption.
It should be noted that it is possible to transfer a residence to a single-member LLC and maintain the residential tax exemption. The IRS considers most single-member LLCs to be the same as the owner. So, in the above example, the residence could be transferred to an LLC and the residential exemption kept as long as only Earl or Fran is the owner of the LLC – although the exemption may be limited to only a single, $250,000 exemption.
The residential exemption for sales can save considerable taxes when selling a home. When selling the residence with a farm, as much of the purchase price as reasonable should be allocated to the residence. If transferring farmland to an LLC, the residence should remain outside of the LLC if possible and/or if the residence is likely to be sold in the future. Like most tax and legal issues, there are exemptions, exemptions to the exemptions and nuances that must be addressed for each individual situation. Be sure to consult with a tax and legal professional for guidance on the rules and regulations regarding the sale or transfer of your residence.
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