Be Careful with Investing in Farmland Inside of an IRA
We continue to get questions regarding investing in farmland within an IRA or a retirement plan. Usually, the farmer wants to purchase the farmland and then farm it themselves. This does not work under current tax laws. This is what is considered a prohibited transaction and will make the IRA fully taxable and subject to penalties. You can invest in farmland under the following conditions:
- You purchase the property for cash, or
- You purchase the property for cash plus borrow money that you do not personally guarantee. If you personally guarantee the loan, your full IRA likely becomes taxable and subject to penalties.
- You rent the ground out to unrelated third parties. If you rent it to yourself or someone to closely related to you to farm, you mess up the IRA.
- You do not put any “sweat equity” into the farmland. Even if you personally go out and clear some brush, fix fences, etc. that messes up the IRA.
Essentially, if you invest in farmland inside of an IRA or retirement plan, you MUST treat it as a passive investment. For most farmers, that is very difficult to do. If you are thinking about buying farmland for your IRA or retirement plan, make sure to discuss this with a qualified tax adviser. If you mess it up, it can cost you dearly.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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