Farm Landlords – What’s my tax rate
If you are a farm landlord, you can be subject to several income tax rates and rules. In general, you will either file your income on Schedule E, Schedule F or Form 4835. Which onewill depend on whether you materially participate in the farm operation – in other words, the extent to which the landlord is involved in the operation of the farm.
A landlord receiving only cash rent will normally report their income on Schedule E and it will not be subject to self-employment tax.
A share-rent landlord, who meets the tests for material participation will normally file Schedule F and be subject to self-employment tax.
If the share-rent landlord is not materially participating in the farm operation, they will normally file form 4835 and not be subject to self-employment tax.
Ohio State University has prepared a very synopsis on how these three types of rents are taxed.
Since most farm landlords are usually retired, it is to your benefit to try to have the income taxed either on Schedule E (cash rent) or form 4835 (share-crop with out material participation) If you do have a share-crop arrangement and wish to not pay self-employment tax, you need to make sure that you fail TWO of the following FOUR tests:
- Advance, pay, or stand good for at least half of the direct costs of producing the crop.
- Furnish at least half of the tools, equipment, and livestock used in producing the crop.
- Consult with your tenant
- Inspect the production activities periodically.
Since almost all farm landlords will perform 3 and 4, you probably will need to fail both 1 and 2. The key term in both of these tests is one-half or 50%. If you make sure to have a crop share of the expenses equal to 49% or less and make sure that you do not provide half of the equipment to farm the land, you should not be subject to self-employment tax.
Another tax benefit is that if you are normally subject to self-employment tax, but you receive CRP payments and are also receiving social security income, you will not be subject to self-employment tax on the CRP payments.
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.
My wife and her sister jointly own a tree farm in Kite, GA. They pay a forestry services company to handle things like tree thinning, planting of seedlings, spraying of chemicals, a pine straw lease, etc.
Does my wife “materially participate” in the operation of the farm?