In the midst of the stagnating economy and fears of a double dip recession, U.S. farmland and cropland values as a whole continue to be bullish. Farmland owners who made the decision to sell their current holdings should consider 2 tax deferred strategies while taking advantage of the trend.
This month the U.S. Department of Agriculture released a report stating:
“The United States farm real estate value, a measurement of the value of all land and buildings on farms, averaged $2,350 per acre for 2011, up 6.8 percent from 2010. Regional changes in the average value of farm real estate ranged from a 15.9 percent increase in the Corn Belt region to a 2 percent decline in the Southeast region. The highest farm real estate values remained in the Northeast at $4,690 per acre. The Mountain region had the lowest farm real estate value, $923 per acre.
The United States cropland value increased by $260 per acre (9.4 percent) to $3,030 per acre. In the Northern Plains and Corn Belt regions, the average cropland value increased 17.2 and 16 percent respectively, from the previous year. However, in the Northeast and Southeast regions, cropland decreased by 1.3 percent and 1.1 percent, respectively.”
Top Five States
| State |
Farm/Acre |
% Change |
Cropland/Acre |
% Change |
| Iowa |
$5,600 |
24.4 |
$5,700 |
23.9 |
| Nebraska |
$1,780 |
17.1 |
$2,960 |
17.9 |
| Illinois |
$5,700 |
16.3 |
$5,800 |
18.4 |
| North Dakota |
$ 980 |
15.3 |
$1,040 |
19.5 |
| South Dakota |
$1,100 |
13.4 |
$1,810 |
16.0 |
Bottom Five States
| State |
Farm/Acre |
% Change |
Cropland/Acre |
% Change |
| Rhode Island |
$13,000 |
-4.4 |
$7,040 |
-1.5 |
| New Jersey |
$12,700 |
-3.1 |
$12,800 |
-3.8 |
| Massachusetts |
$11,000 |
-2.7 |
$7,040 |
-1.5 |
| Georgia |
$3,800 |
-2.6 |
$3,560 |
+0.6 |
| Alabama |
$2,050 |
-2.4 |
$2,350 |
-2.1 |
Factors Impacting Farmland Values
Fueling strong demand for farmland from farmers and investors is the result of a number of factors including:
- Low interest rates
- World demand for food commodities of corn, soybeans and wheat
- Ethanol mandate
- Weather
- Improved farm technology
- Disease resistant seeds
- Reduced supply of available farmland for sale.
In addition to farmland demand, News.Gnom.es, a national newswire service, reports that “firms like Omaha-based Gavilon, owned by Ospraie, a hedge fund associated with George Soros and Canada-listed Ceres Global Ag have been buying up grain elevators from Wyoming to Toronto.” Evidently, given the demand for grain, warehousing and transporting have been uncovered as a profitable investment warranting non-traditional investors.
Common Denominator: Tax Deferral Strategy
So, how to capitalize on the surge in farmland prices? When the decision is made to sell the farmland holdings, tax deferral strategies need to be evaluated.
- 1031 Exchange: One of those is whether to reinvest in like kind real property or not. Farmland and grain elevator businesses can be sold and capital gains taxes effectively deferred when replaced with like-kind property.
- Deferred Sales Trust: If replacement property is not the intent, a Deferred Sale Trust can provide an alternative, deferring capital gains taxes, investing the proceeds and paying the recognized gain on a schedule that suits the taxpayer.
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Interesting information Andy. Maybe in a future article you could give us a lay understanding of how the Deferred Sales Trust works.
It’s also fascinating to me that farmland in the 3 states named in the NE is worth more per acre than cropland according to your charts. That must be equestrian plantations or mini-farms or something. That trend is definitely opposite of our market in Alabama.
Thanks for sharing.
Hello Jonathan, another reason why NE farmland values maybe higher is the premium/demand placed on land in heavy metropolitan areas.
Briefly, a Deferred Sales Trust is similar to an installment loan between the taxpayer and a trust holding the proceeds of their sale. Those funds are invested and paid out per directions of the taxpayer. It is an alternative to a 1031 exchange when the taxpayer does not want to acquire a replacement property yet, defer the capital gains. More to follow.
Regards,
Andy
Food is pretty addictive…need to find some usually at least three times a day. A quality acre of ground is more life and death important than a bar of gold. Food is the ultimate weapon for any nation. Have none and nothing else matters. Or that loaf of bread is the world, you will do anything to get it if your family is starving. We take quality, plentiful food for granted…. until it is scarce, missing, gone.
Could a Deferred Sales Trust be used in the interim of finding the right property to buy for a 1031 Exchange? How soon can the DST be sold for a 1031 Exchange or must there be a holding period like the 1031 has?
Hello Phyllis. Let me check and I will get back with the answer.
The DST will not work as a temporary place to park the money because it will no longer be like kind property. However, if suitable replacement property cannot be found within the time constraints of a 1031 and chose to do a DST, the trustee could purchase real property within the trust itself, under certain conditions. The short answer to your question is that the DST cannot be used to extend the 1031 exchange time periods.