A gentleman farmer is a wealthy landowner who oversees a small farm purely for the pleasure of it—and for the pleasure of the tax breaks it generates. In this age of artisanal everything, the notion of tending to your acreage as a hobby is suddenly terribly chic. People who own as little as three acres and engage in agricultural practices such as hay harvesting, bee keeping, chicken raising and designating land for grazing animals may find themselves rewarded by localities with an enormous discount of up to 95% on property taxes.
Barron’s talks about tax breaks for farmers in a recent article titled “A Harvest of Land-Related Tax Breaks.”It seems some of the members of our nation’s farming community may surprise you. Malcolm S. Forbes Jr. and Jon Bon Jovi are among many other famous business folk, celebrities, and politicians with a sideline in farming. While most tax breaks for landowners occur in a single year, according to the original article, property-tax discounts awarded for agricultural activities are “reaped” annually, just like soy beans, corn, and alfalfa.
Taxpayers using their land to grow timber can find benefits beyond the property-tax break: Timberland is great for wealth preservation. Even when land values or the demand for timber tails off, the trees on your farm continue to grow. Experts say that timber growth can provide an annual return of roughly 2% to 6% a year, and once you sell your timber, your profits are taxed as capital-gains, instead of higher income tax rates. It’s only when you manufacture products like pulp or poles from your timber crop that income tax will apply.
Consider a conservation easement as another vehicle from which to generate a substantial income tax deduction. How does this work? A conservation easement is a portion of land earmarked as off-limits to development, so you would see an income tax deduction equal to the value of the land assigned to the easement when it was created. The estate planning benefits are also worth noting: this easement depresses the value of the property, so when it’s subject to estate taxes in the future, this will be at a lower value. The property’s value will also be reduced when you sell. Be sure to consult with an experienced estate planning attorney about these scenarios.
If you plan on passing your land to future generations, you might be able to discount the value of your property for gift and estate tax calculations, but you need to start the property transfer process during your lifetime. Again, your attorney can help you. Make an appointment now to buy the farm before you “buy the farm.”
You can learn more about this topic as well as other strategies on our website under the tab entitled: estate planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.
Reference: Barron's (February 28, 2015) “A Harvest of Land-Related Tax Breaks”