How to Sell Farmland by Owner
Selling farmland is a complex process that requires careful attention to detail. It involves more than just a simple transaction—it’s a business decision that can have long-term financial implications. This guide is designed for landowners who want to take on the sale themselves while ensuring they address the key aspects that make farmland sales unique.
1. Standing Crops and Harvesting Rights
The most urgent and crucial issue in farmland sales often involves standing crops. Knowing who owns the crops at the time of closing is essential.
Who owns the crops? Typically, the seller retains the rights to harvest crops planted before the closing date, but this must be clearly defined in the purchase agreement.
Negotiating harvest access. If the sale closes before the harvest, an agreement that allows the seller to access the land and equipment for harvest must be made. This includes the right to use access roads and transport.
Selling with the crop. If a buyer wants to purchase the crops along with the land, a fair market value for the crops needs to be set. This inclusion could affect taxes, so it’s important to consult an accountant.
Many states offer templates for these types of agreements, like Texas’ Farm and Ranch contract, which ensures the seller’s right to harvest until the property possession is transferred.
2. Existing Farmland Leases
Farmland leases significantly affect the land’s value and sale process.
Oral vs. written leases. Many leases in agriculture are informal verbal agreements. While these are legally recognized in many states, such as Illinois, the laws require notice before terminating them.
Lease termination. Understanding how to terminate a lease according to state laws is vital, as some tenants may have the right to farm for the full season even after a sale is agreed upon.
How leases affect property value. For an investor, a stable cash-rent lease can be a valuable asset, ensuring consistent income. However, a farmer who intends to work the land might see a long-term lease as a drawback. Be prepared to disclose these details early to potential buyers.
3. Federal Programs and Assistance
Participation in federal programs can increase a farm's value, and understanding the necessary details will ease the transition for the buyer.
Farm Service Agency (FSA) and base acres. The farm number and base acres from the FSA are key to accessing federal programs, such as disaster relief. Ensure that this information is transferred at closing.
Conservation Reserve Program (CRP). If the land is enrolled in the CRP, where payments are made for not cultivating the land, it’s important to clarify whether the buyer will continue the contract or end it.
4. Specialized Farmland Appraisal
A farmland appraisal is different from a residential appraisal and requires attention to the unique features of agricultural properties.
Soil quality and productivity. The value of farmland largely depends on its soil type and quality, which impacts potential yields. An appraisal will consider soil maps and crop history.
Yield data. Providing the buyer with historical yield data can help establish a higher value for the land by proving its productive capacity.
Infrastructure and drainage. Well-maintained infrastructure like grain bins, outbuildings, and drainage systems adds significant value to the property.
5. Navigating Complex Agricultural Rights
There are several unique property rights that come with farmland ownership that can significantly affect the sale process.
Water rights. If your property has access to water for irrigation or livestock, you’ll need to determine if it’s covered by riparian or appropriative rights. Buyers will look for clear documentation on water access.
Mineral rights. Check if any mineral rights, such as those for oil, gas, or minerals, were sold separately. This could influence the sale and should be clearly disclosed.
Timber rights. If your land has timber that could be harvested, ensure it’s clear whether the right to harvest timber transfers with the land.
6. Tax Strategies for Farmland Sales
The tax implications of selling farmland can be substantial, and understanding these can help you manage the financial impact.
Depreciation recapture. If you’ve written off farm assets, you’ll need to recapture depreciation when you sell, which can result in ordinary income tax rather than a capital gains tax.
1031 Exchange. A 1031 Exchange lets you defer taxes by reinvesting the proceeds into another similar property.
Installment sale. An installment sale allows you to spread the tax burden over several years, potentially keeping you in a lower tax bracket.
Conclusion
Selling farmland on your own can be rewarding, but it requires careful planning and knowledge of the specific details that make farmland sales different from other real estate transactions. From standing crops to complex property rights, being well-prepared and working with professionals will help ensure a successful sale.
