Owning managed farmland is a smart investment. Managed farmland consistently increases in value, is a strong inflation hedge, outperforms the stock market, provides a long-term passive income and allows you to diversify away from the vagaries of Wall Street. But, like any income-generating investment, there may be taxes involved and maybe even tax advantages.
Whether or not you will owe taxes on your farmland harvest payment does not have a simple answer. Ultimately, you may want to consult a tax professional but the information below will at least introduce you to the issues and questions involved.
Some of the many variables include:
- How you are holding the investment (in your name, in a legal entity like an LLC or a tax-protected account).
- Where you reside.
- Your country of citizenship.
- The type of investment (greenhouse, tree crops or timber).
- Where your investment is located.
That said, it really boils down to two broad considerations; the taxes levied by your country of citizenship/residency and the taxes levied by the country where your investment is located.
Taxes Based on Citizenship/Residency
Only four countries in the world assess taxes on their citizens no matter where they live and no matter where the income is earned – the United States, Burma, Hungary and Eritrea (I’m going to resist the temptation to go on a rant regarding the U.S. tax code).
I doubt there are many folks from Burma, Hungary or Eritrea reading this, so the information in this section of the article applies only to U.S. Persons as defined by the U.S. Treasury.
If you are a U.S. citizen or resident you will owe taxes on the income earned from your farmland investment if it is not in a tax-protected account like an IRA, SEP or 401(k). As an example, if you buy a strawberry greenhouse in Paraguay and receive a $100,000 harvest payment, that is earned income for U.S. Persons and you will owe tax on it.
The bottom line is that if you earn income from a farm investment even if it is located outside the U.S., you owe taxes on it.
OK, are there ways to avoid or defer the tax? Are there deductions I can take? Yes, and Yes.
Farmland Held in A Self-Directed IRA Or 401(k)
For U.S. residents and citizens, owning your farmland investment within a Self-Directed Individual Retirement Account (SDIRA) or 401(k) is a common way to reduce or delay taxation (read more in Use A Self-Directed IRA or 401(k) to Buy Farm Land).
Most of the agricultural investments I own are held within a self-directed account and the same goes for a great many of my U.S. clients.
Traditional Accounts: A traditional IRA or 401(k) defers the taxes that you owe. The idea is that you will be in a lower tax bracket when you start taking distributions and you will save in the long run. The amount placed into your tax-deferred account is not taxed at the time of the contribution, so you only pay taxes on it when you take a distribution during retirement.
In the case of a farmland investment, the harvest payment is paid to your self-directed account, much like dividends from stocks you might own in your workplace IRA. A harvest payment is not a contribution, so in a traditional (non-Roth) account the taxes are deferred until you begin taking distributions.
So, let’s say you bought a ½ hectare orange grove in Paraguay for $35,000 and you’re now getting annual harvest payments. It’s year 8 and you received a payment of $10,000 into your IRA. You don’t owe any taxes at the time your IRA receives the payment, but you will owe taxes on whatever distribution you take in the future.
In general, current law says you can begin taking distributions at age 59 ½ and must begin taking distributions at age 72 (see the links for more details).
Roth Accounts: On the other hand, contributions to a Roth IRA or 401(k) are made with after-tax dollars. In other words, you pay taxes at the time the income is earned, but when you take a distribution after age 59 ½ you pay no additional taxes.
The great thing about a Roth account is that harvest payments still aren’t contributions any more than dividends from a stock holding would be. The result is your investment may yield a greater return than traditional accounts because your ROI (return on investment) is on after-tax income.
As an example, I paid $15,200 for a 16-year-old teak lot with a projected harvest payment between $90,000 and $100,000 in 2025. When 2025 rolls around, the payment will go into my Roth account and no taxes will be due when I take a distribution because I paid for the investment in 2015 using after-tax dollars. In other words, I’ve already paid the taxes.
I prefer the Roth account because my assets are appreciating along with providing income. Additionally, unlike drawing down the value of the run-of-the-mill IRA or 401(k) that holds equities, the income on my investments is perpetual and won’t disappear when all the stocks, bonds or mutual funds are sold.
Farmland You Own Directly or in A Legal Entity
I own a few farm investments in an LLC that I directly control. The primary advantage is that if I die my heirs don’t need to deal with retitling property in another country. My succession plan is in my will and reiterated in the LLC Operating Agreement, which I can easily change by filing a form with the Secretary of State where the LLC was formed.
Regardless of whether your farm investment is held in your name or the name of an LLC, they are held outside a tax-protected account and you owe taxes when you receive a harvest income.
A possible upside is that if you hold your agribusiness investment outside of an IRA, SEP, 401(k) or other tax-deferred vehicle, you may be able to deduct expenses related to owning your farmland or greenhouse.
Deductions
Obviously, check with your tax advisor, but some of the potential deductions include:
- Taxes paid to foreign governments, including income and property taxes (IRS Form 1116).
- Travel costs for an inspection trip.
- Management fees (most managed farmland investments have an annual fee for your share of routine costs).
- Non-routine upkeep, repair and maintenance costs.
- Depreciation expense (you can’t depreciate the land, but any other systems such as irrigation lines or a greenhouse structure might apply).
- Expenses related to managing your assets such as LLC legal fees, wire fees, international long-distance calls, etc.
Taxes Based on Investment Location
When I look at a new investment, along with ROI, risks, marketing, experience, access to water, workforce skills and past performance, I take into consideration the tax implications of earning an income in the country where the farmland is located. Here are some examples:
- In Panama, there is no personal income tax if your farmland income is less than $350,000. There is also no tax on reforestation income (this includes my current Teak and lime tree offerings). Property taxes are minimal (last year I paid $52 for 4 hectares of land). There is a 25% business tax that applies to the Cacao offering because of the way it is structured, but this is paid by the company and included in the ROI projections.
- The Teak land that I offer in Nicaragua is subject to a 1% local tax and a 1% national tax that is deducted from the harvest proceeds and included in the ROI projections.
- Paraguay has no real estate tax, but there is a 10% income tax (this is paid by the company and included in the ROI projections for the Strawberry Greenhouse and Orange Grove offerings).
Tax Deductions for U.S. Persons Living Abroad
This article isn’t about what forms to file. However, if you’re an American living abroad you likely still need to file the requisite FATCA and FBAR forms. As always, if in doubt you should consult a tax professional.
There is a common misconception that if you are a U.S. Person then you automatically qualify for the Foreign Earned Income Exclusion, but the FEIE only applies to your salary… not capital gains, dividends, rents, royalties, and passive income no matter where you live. Think of your farmland income as rental income.
Taxes for Non-U.S. Citizens And Residents
I have clients in the U.S., Thailand, Portugal, Bali, Nicaragua and elsewhere around the world. There is no way I could research every potential tax liability or deduction.
So – regardless of where you live or what your citizenship is, make sure you check with a tax professional to fully understand what your situation is and how you can minimize the taxes on your passive farmland income.
The Bottom Line
The above is intended to raise questions more than definitively answer questions regarding the potential tax implications of owning farmland.
The simple fact of the matter is that whether you’re invested in the market, hold mutual funds in your IRA or own farmland, you’re going to owe taxes and you need to know how to manage that expense and maximize your profits.
As I state repeatedly on my website, I’m not licensed by the SEC. I’m not an accountant. I’m not an attorney. And I am not a Certified Financial Planner.
What I am is an average guy who got sick and tired of being locked out of investment options that were only available to the wealthy and found ways to get in the game. I provide my personal insights regarding offers to acquire international real estate to be used in the production of agriculture.
