Created on Sunday, December 06, 2015
Updated on Monday, February 26, 2018
by Land Century
Generally, when you inherit a farm or ranch, you have three options: farm it, hold the land as an investment, or sell the property.
Farming the Land
The first and most obvious option is to farm the land. Choosing to keep the property and continue farming it can wind up being a very profitable decision, but there are a number of things that must be considered first. One of the primary considerations is whether or not you have the skills and resources necessary to keep the farm going.
If youre already working on the farm or have experience with farming, the next question is: how will the farm fit in with your current operation? If you own a separate farm, will the new farm be added to the current operation, or will it serve as a separate operation?
If you have no farming experience but would like to start, its important to sit down and consider whether or not youre truly ready to make such a major life change.
Roughly 60% of all farms have sales of less than $10,000. Farms of this size cannot possibly support a family. If the farm falls into this category, you will need to ensure that you have off farm employment to supplement your income. Whether or not the farm can support your familys lifestyle is something that needs to be addressed before you make the decision to keep and farm the land.
The primary consideration when deciding whether to farm the land is to estimate the amount of income that can be generated from the operation, and whether this income is sufficient for you and your family. Remember, annual income can vary from one farmer to the next and from year-to-year. Land values on farms, commodity prices, weather, input costs and yields are just some of the many factors that will influence your income.
Holding the Land as an Investment
If you feel that farming the land is not the right decision for you, you may consider holding land as an investment. In this regard, you have a few different management techniques available to you, and each one involves varying amounts of time and effort. Some people choose to hold an active role in running the farm, while others prefer to take a hands-off approach.
Here are a few of the options that you have if you choose to hold the land:
Leasing your land to others is a popular option. According to the Census of Agriculture, 54% of farmland was released in 2007. The great thing about this option is that you have a number of different arrangements available to you. One of the most common leasing arrangements is cash rent or crop share. When cash is involved, the tenant bears the majority of the risk. If you choose crop share management, production and price risk will be shared between you and the tenant.
The biggest issue with leasing is determining a fair rental rate. You may consider consulting with a professional to determine a fair leasing price for your farmland.
You also have the option of hiring a professional manager to run the farm for you. This is a great choice for anyone that wants to keep the farm for investment purposes, but does not want to make any business decisions related to the farming operations. This type of arrangement will vary from one farm to the next, but more often than not, a professional farm manager will run the farm and the owner will make no business decisions.
The farm management firm will receive a percentage of the gross income, and the owner, you, receives a check. This option is about as hands-off as you can get.
If you prefer not to lease the land, custom farming is an option as well. In this case you, the owner of the land, will make decisions regarding inputs, crop and marketing. However, you will hire other people to perform the work for you. Custom operators will handle all the machinery operations on your land in exchange for a set rate or fee. This arrangement has less risk, but during a bad year profits from custom farming will be much lower than a conventional lease.
Whether you want to be active, semi-active or completely hands-off, you have options available to you if you decide to hold the farmland as an investment.
Selling the Land
If you decide not to lease or hold on to the farmland, your only other option is to sell the property. This option is a smart choice for anyone who has no interest in farming, and would rather not deal with the work involved with leasing or hiring others to manage the farm.
And if you prefer to use the proceeds of the inheritance for other purposes, this is your only option.
If youre considering selling the property, there are many things that you need to keep in mind. For one thing, there will be tax consequences depending on the method of sale, income tax basis of property and the sale amount.
You have the option of selling the farm as a whole, or dividing the property into smaller tracks and putting them up for auction. Or, you can just sell the farm through a land auction.
Selling can be a complex task because often times, it can be difficult to set a good selling price. Land markets are not as well defined as the real estate market and frequently traded commodities. For this reason, its best to hire a professional to perform an appraisal to establish the value of the land and help you choose a selling price that will attract buyers.
When selling the property, you have four primary options:
- Contract sale
- Cash sale
The Bottom Line
If youve inherited farmland, you have a major decision to make: do you continue farming the land, hold it as an investment, or sell it? This is a decision that you dont want to take lightly, so take the time to sit down with your family or other heirs to come to an agreement on how to handle your inheritance.