As an older generation of farmers begins to retire, the actual process of farming is consolidating. While some farms in the Midwest become that much larger, other farmers elect to sell their land in plots as a form of retirement collection. Investments in farmers' lots can be a tricky realm of property purchase, where many factors should be considered. Doing proper analysis and understanding the laws behind development and re-zoning can help the process work for both the buyer and the seller.
It is important to understand any federal, state, and county tax program in which the current owner is enrolled. The 1977 Farmland Preservation Act of Wisconsin, for example, allows major tax incentives of agriculturally zoned parcels over 35 acres, provided that the land is not rezoned for any other use within a given time period. This precludes development. For the prospective hobby farm this amount to huge tax benefits, but for someone looking to build a home it could cause further complications. Ensure that the land deed is "warranty", as to avoid any potential legal battles.
One of the best ways to learn more about zoning laws for farmland is to visit the county's Land Conservation Office. This department may have a different name depending on where you are so check with the county clerk to ensure you're in the right place. It may be a good idea to check with the United States Department of Agriculture's local field office to discuss land purchasing options and to review important farm land maps. These maps could potentially identify "hot spots" where approvals for everything - from new irrigation ditches to condominiums - may prove difficult.
Buying farmland has as much to do with your intentions as it does with your abilities. Do you want this area to be re-zoned, or do you want to continue using it as a farm? For the latter, there are a great many tax incentives to be gained - especially in Minnesota, Wisconsin, and Iowa - for maintaining the agriculture purpose of your farmland. In addition to laws such as the Farmland Preservation Act, a resident farmer can also claim any loss' and equipment investments on their taxes.
Another farmer's tool is the Farm Use Value tax law. This IRS law says that agriculturally zoned land is only taxed based upon the value of the property being utilized. This is in stark contrast to residential and commercial lots, which are taxed on the highest and best use of the land. This is an important law to note, particularly in the first years of agricultural land usage when utilization may not be at its peak.
Soil considerations are also vital to the would-be farmer. In Minnesota, soil specialists have identified seven of the world's twelve different soil types. Such variations in the dirt can also make variations in the farmland's capability.
Even investors have begun to see potential in purchasing farm land. As a long term agricultural investment, many investors are buying vast swaths of farmland entirely for its ability to produce. Forbes magazine recently highlighted one such investor by the name of Frederick Gillis III. Though large fluctuations in value can leave short-term investors fluttering, farmland receives annual gains in the 6-8% range. The benefits of purchasing farmland don't always require an owner to strap on overalls and boots.
As a potential developer, be sure to run your plans by the county zoning commission and real estate agent. In Wisconsin, be ready to host a variety of meetings making your development plans known to the community - a part of compliance for the Smart Growth Law. Be ready to be flexible and work with the wishes of the community. In many instances, farmland has been in the same family name for many generations - and that family name will have many neighbors throughout. Tread lightly and be prepared for a small amount of skepticism.
When purchasing farmland in Minnesota, one will find a robust market. This is attributed to the 1031 Tax Exchange Deferment, whereupon capital gains from a land purchase deal can be deferred. This has given a greater purchasing power to a much more broad buying market. In 2005, farmers were watching their land reach a 20 year peak of almost $5,000 an acre. While the tax deferment can be a great benefit to the farm land purchaser, be sure to consult with a lawyer or other 1031 expert on the specifics. Improperly requesting a 1031 capital gains deferment can cause significant problems and elicit severe penalties.
The benefits of farmland can be great, but beware of the pitfalls. The preservation, sale, and development of farmland can be highly politicized, and any wrong move could potentially leave a buyer in a bad situation. It is important that prospective buyers be upfront with their intentions from the beginning of the process. When everyone understands the objective, then finding the right plot of land for your needs becomes much simpler and worry-free.