Lots has been written about the direct ownership of residential real estate using Self-Directed IRAs. But what about owning farmland? Is it possible to own a farm within your IRA?
The answer is yes… and indeed many of our clients here in North Carolina, South Carolina, Georgia and the southeast do just that. If you have expertise in farming, ranching or any other agricultural endeavor, it is quite possible to leverage that within your Self-Directed IRA. Indeed, doing so has important tax benefits to anyone who does:
- Taxes on capital gains are eliminated when you hold the property within an IRA.
- Taxes on income are deferred indefinitely. You only pay tax on traditional IRAs when you take assets out in the form of income.
- In the case of Roth accounts, your distributions are tax-free (provided you’ve kept the money in the Roth at least 5 years.
Take the case of John, a lifelong farmer from a long line of farmers, right here in North Carolina, who found some promising farmland he wanted to buy near Black Mountain, NC. He bought the land for about $2,000 per acre using money he had in his IRA 10 years ago. The land benefits him in two ways:
First, it generates about 8 percent in cash rent from a couple of farmers who are using his land to grow tobacco and other crops.
More importantly, though, the land has increased substantially in value in recent years, thanks to some terrific economic activity here in Asheville and nearby Black Mountain. We’re not sure how much yet… we’ll know when John decides to sell it. But by holding the land within his Self-Directed IRA, there has been no tax consequence to it, and because it’s in a Roth IRA, when he finally does take distributions they’ll be tax-free as well.
John has a choice between selling the land and taking the cash at some point, or reinvesting so he can earn interest or rent on some higher amount of principal (he could possibly raise rent rates, as well), or he could keep the land and keep renting it out indefinitely. It’s up to him. He’s in the driver’s seat.
The things to keep in mind with self-directed IRAs and farms include some rules prohibiting self-dealing and conflicts of interest:
- You can’t draw a salary from the farm.
- You can’t hire your spouse children, grandchildren, parents, grandparents, or those of your spouse, nor any entity they control.
- You can’t commingle your personal funds with the IRA funds.
- You can borrow money, but only on a non-recourse You can’t sign a personal guarantee or pledge anything as collateral that is outside the IRA.
- You can’t take the livestock depreciation deduction.
By renting the land out, rather than farming it himself, John has sidestepped all these issues. As long as he doesn’t rent the land to a prohibited counterparty or entity controlled by one of these prohibited counterparties, he is fully in compliance with the law.
American IRA works with Real Estate IRA holders in nearly every state in the union. Many of our clients hold a position in farmland, ranches and other agricultural assets and have done very well.
If you have a passion for farming and some IRA or 401(k) assets you’d like to put to work, we’d love to work with you. Call us today at 866-7500-472(IRA), or visit our extensive online resource library at www.americanira.com.
We look forward to serving you.