Can My IRA Own Farmland?

We continue to get this question fairly often.  A farmer has some excess cash in their IRA or retirement account and would like to purchase farmland since they feel this is a better investment than what they can get from the bank.  Yes, they can do this, BUT, there are many potential drawbacks.  First, they will need to set up the IRA with a custodian that will handle these types of investments.  Then, they need to make sure the following does not occur:

• They cannot farm the land themselves (or have close relatives farm it).
• They cannot loan money to the IRA to purchase the ground.
• If they borrow money to purchase the farmland, they cannot personally guarantee the mortgage.
• If they borrow money to purchase the farmland, this may require the IRA to file a tax return and pay income taxes on the net income from the rental and from selling the ground later on.
• They cannot put any sweat equity into enhancing the ground.

Also, as they get close to retirement age, the required minimum distributions will start to kick in and this may be problematic with owning farmland in an IRA.

The bottom line is that an IRA can own farmland, but they drawbacks may make it not worthwhile.  If this is something you are interested in, you MUST discuss with someone who knows the rules.  If you get it wrong, in some cases, it can cost most of the funds that you have in your IRA.  Don’t do that.

Paul Neiffer, CPA

CliftonLarsonAllen, LLP