Boost Profitability of Your Farm for Sale in Ohio: 2 Determining Factors in 2023
If you are one of the 75,000+ principal farm operators in the state Ohio, you know that having a farm for sale in Ohio is unlike selling any other property. With the recent boom in housing sales and commercial real estate development, farmland has proven to generate a significant return on investment for you, the land owner.
By no means are we suggesting it’s a difficult process to sell farmland; however, the effort you put into prepping your farm for sale can pay off. Two main factors will determine your sale’s profitability: land evaluation and taxes. Therefore, we recommend you focus your attention here.
Okay, so preparing a farm for sale doesn’t sound glamorous or fun, but who said commercial property investment or sales were exciting propositions? (Actually, we think they are, but that’s why we’re a firm dedicated to commercial real estate, and aiming to help you right now.)
So, what do we mean when we recommend you focus on farmland evaluation and taxes? We break down each point for you, below:
Factor 1 – Evaluation of Your Farmland
When buyers are looking to purchase Ohio farmland for sale, they will have a lot of factors to consider when evaluating the land. You may have assessed your farmland upon purchase, and have since appraised it for current value; however, also take the time to consider who your farm buyers might be and what they may be evaluating.
Evaluate Farm Soils:
While soil fertility is not as important as the inherent soil properties, it is likely that your farm buyer will dig deep into both of these areas. And, just because you have an open field doesn’t mean you will have productive farmland. It is critical that you understand your farm’s specific soil and how it could impact harvests. So, what should garner your attention when evaluating soil? The nutrient and moisture level within your soil determines soil quality. Make sure you check the texture of your soil, the organic matter content, and the color and consistency; also see how well it drains and how far it lies from the water table. All of these qualities can drastically change from region to region and impact crops.
Tip: “Web Soil Survey” provides soil data and other information on soil evaluation that is produced by the National Cooperative Soil Survey. Findings such as soil classification and ratings are especially helpful for those looking to buy farm land. Look up your land and get in the know.
Evaluate Land Use Restrictions:
Over time, legal restrictions on land use can change drastically. As such, there may have been one set of standards when you purchased your property; and there may be a different set of requirements on the day you list your farm for sale in Ohio. Get up to speed on any restrictions, such as your area’s zoning requirements and building codes. Also, know where your property’s boundaries are. Understanding the basic facts of your parcel will allow you to provide prompt and informed feedback to prospective farm buyers.
What You’ll Need to Know: When it comes to land use, pay attention to zoning ordinances, covenants, easements, and agricultural use restrictions, to name a few. The latter, agricultural use, is particularly important because properties that are said to meet the criteria for agricultural use are taxed at a lower rate. For instance, certain commercial agricultural crops are valued according to Ohio law, known as CAUV or Commercial Agricultural Use Value. If that usage is less than the potential use of the land, it can result in a significantly lower tax bill for the farmland owner.
Learn more about tax rates and tax-saving tips in the next phase, below.
Factor 2 – Taxation and Tax-Saving Strategies for Your Farm for Sale in Ohio
“Taxes” is probably the most dreaded word in the English dictionary. Nobody enjoys them (unless, of course, you’re an accountant). However, it isn’t as scary as it sounds once you learn the basics!
When reviewing the taxes involved in selling your Ohio farmland for sale, be aware that various taxes are applied to the sale of land. While the tax consequences of the sale of your farmland may not be the deciding factor as to whether you sell or hold your property, it is essential that you understand the factors that could impact your profit. Awareness of the possible taxes will undoubtedly make the entire process much easier when you go to sell your farmland; it will also be less of a surprise when it comes time to pay the taxes.
Pay attention to these 3 taxes when you sell farmland:
- Capital Gains Tax. When you sell a capital asset, such as farmland in Ohio, the profit is subject to taxation. Capital gains tax is imposed on the profit; essentially, the difference between your original purchase price and the sale price. The Ohio capital gains tax can be as high as 5.4%; however, when combined with the Federal capital gains tax, it can be as high as 28.9%.
- Depreciation Recapture. Depreciation is the loss of value for an asset over time, which can be recognized as an expense by the IRS. If the asset sells at a gain, ordinary income tax applies to the depreciation expense. As such, the expense has been “recaptured.” Expect your farm for sale in Ohio to be taxed at 25% on all depreciation recapture.
- Net Investment Income Tax (NIIT). The Net Investment Income Tax (NIIT) is a 3.8% IRS tax on certain net investment incomes of individuals, estates, and trusts above specific statutory threshold amounts. The NIIT applies to the lesser of the taxpayer’s net investment income or the amount by which the modified adjusted gross income (MAGI) surpasses the statutory threshold amount based on their specific filing status.
The NIIT statutory threshold amounts (as of spring 2023) are $250,000 for those married but filing jointly; $125,000 for those married but filing separately; $200,000 for those who are single or the head of household; or $250,000 for those who are a qualifying widow(er) with a child. Net investment income generally includes interest, capital gains, dividends, income from rental fees and royalties, and non-qualified annuities. It does not generally include wages, most self-employment income, alimony, unemployment compensation, Social Security benefits, or any gain on the sale of a residence excluded from gross income for regular income taxes. Determine the amount of investment income subject to the NIIT and how much you owe by completing IRS Form 8960.
Do you want to avoid some of the abovementioned taxes when selling your land, and keep more dollars in your wallet? Assuming the answer is ‘yes,’ the next section will help.
Employ these 3 tax-saving strategies for farm sales:
- Set up an IRC Section 1031 Tax-Deferred Exchange. A 1031 Exchange is one of the most effective tax-saving strategies available to farmers, ranchers, and farmland investors; it can allow taxpayers to sell their farm and purchase another like-kind (basically, similar) farmland, while deferring capital gain taxes.
- Create an IRC Section 664 Charitable Remainder Trust (CRT). Also referred to as a Capital Gains Avoidance Trust, a CRT can allow taxpayers to defer or entirely avoid capital gain taxes when selling appreciated farmland. Essentially, the funds from the land sale are directed to a CRT to reinvest. The trustee(s) then generates an income regularly. When the trustee(s) die, the remaining funds are donated to a specified charity.
- Form an entity for your farm. Most investors own their farms as an LLC, partnership, or S Corporation, while some do so as a C Corporation. We urge you to speak to your accountant or tax professional about the best approach for farms for sale in Ohio; however, having a business entity can prove certain tax benefits, mainly due to the laws passed by the United States Congress back in 2017.
Tip: Regarding the tax implications and tax savings associated with selling Ohio land, our best advice is to get help. Consult with a tax advisor or certified public accountant as you list the price and negotiate with prospective farmland investors. Also, ensure your commercial land broker or commercial real estate consultant is involved. Direction from the experts will ensure that your profitability expectations are met.
Get Your Farmland Sold
That’s it! We bet it’s not as complicated as you thought it would be! Now that you know what to do, you’ll be better prepared to answer questions from those searching farms for sale. The next step is listing your farmland on the market!
At The Robert Weiler Company, we’ve been providing our CRE expertise to Columbus and throughout Central Ohio since 1938. And, there was much more farmland in Ohio back then! As such, we understand the investment potential of your land and know how to maximize profit. Call one of our commercial land brokers at 614-221-4286 to assist you in getting the best ROI for your farm for sale in Ohio.