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Is It a Good Time to Buy or Sell Agricultural Land?
Curtis Talley, Jr.
Extension Farm Management Educator

A number of factors have come together to provide unique circumstances that may be beneficial to both buyers and sellers of agricultural land: strong demand for land; interest rates at almost all-time lows; and, long term federal capital gains tax rates not seen since 1933, are all involved. Let’s take a look at these factors.

Demand for Land

Interest in farmland is rising globally. Population growth, rising incomes and migration from rural areas to urban locations is driving demand for food products, oilseed and livestock. The world’s population is growing 1.2% annually, fuelling the increased demand for protein at a 2.5% annual rate. Arable land is declining in China, India and the U.S.(1)  The world historically held large reserves of food and fiber in storage, but those reserves have been liquidated due to large scale floods, droughts, or other weather events that have occurred. China used to carry a year’s corn crop in reserve, but it is down to 20% of last year’s crop. India used to carry almost a year’s reserve of wheat, but it is down to 35%. China and the U.S. historically carried 50% of a year’s cotton crop, but that is almost all gone (2). 

Institutional investors (pension funds, private equity groups) see farmland as a diversification to their portfolio, an inflation hedge, a safe haven and a source of stable returns. Institutional investors seek long-term stable returns of 6 to 8% and that can be done with agricultural land. Since 1970 farmland averaged returns of 12% annually, better than the S&P 500, but with the risk of corporate bonds.(3) The only investment that has shown less volatility than farmland long-term returns has been U.S. Treasuries.(4)

Investors historically have done their best to avoid overpaying for agricultural land. They are looking for a 5% to 6% gross cash return, so if land is priced at $3,000/acre, a cash rent of at least $150/acre is necessary. 

Recent weather events, increasing demand for food, fiber and protein brought on by higher incomes in developing countries and population growth, have contributed to a significant increase in commodity prices. This in turn, has increased net income levels for farmers, providing the additional cash flows that have contributed to increase the demand for farmland.   
Interest Rates
According to Federal Reserve Board statistics that began in 1930, the prime rate (what commercial banks charge their best customers) did not exceed 2% until after 1950. Since then, it has fluctuated from 3% to 20%. The prime rate has been declining since 1980 and during the first week of May, 2011 it was 3.25%. This current historically low prime rate has translated into low mortgage rates that began around 2004. Are we taking these low rates for granted? It is easy to forget historical trends. Between 1976 and 1981, mortgage interest rates ranged from 11% to 21% range.(5) That was a doubling of rates in 5 years. My wife and I bought our first home in 1986 and we were tickled to death to obtain a 13% mortgage rate. It had gone down from 15%.

No one knows how long these low rates will last, but some experts sense they are close to a bottom. Many feel there is a greater chance of rates going up than going down, particularly after 2012, when the economy is predicted to have recovered more from the current recession.

Taxes from Income
We are in a period of historically low long-term federal capital gains tax rates. Rates have historically been at least 20%. The period from 1922 to 1933 is the only period that rates were 12.5% or lower. From 1934 to 1996 the maximum capital gains tax rate exceeded 25% and was in excess of 32% from 1970 to 1978. This increased to as high as 39.9% between 1976 and 1978. For a married couple filing jointly with $69,000 or less of taxable income, the capital gains tax rate will be 0% in 2011. 

Capital gain is the profit you make from holding a capital investment such as land. It is also the price received from the sale of farm raised cull cows. For example, if you buy a parcel of land for $4,000/acre and hold it longer than one year, sell it for $5,000/acre, there is a long-term capital gain of $1,000/acre. There can be deductions to this gain to reduce it slightly, but for the purposes of this article the gain is $1,000/acre. The tax rate applied to the gain is based on the income tax rate bracket of the payor, or in this case the seller of the farmland. 

If you sell a 50-head of farm-raised cull cows at $1,300/head, the income of $65,000 receives tax treatment like long-term capital gain.  
The federal government levies a tax on long-term capital gains based on the taxpayer’s taxable income bracket. Under current law (until the end of 2012), if your adjusted gross income is less than $69,000 for a married couple ($34,500 single), the tax rate for long-term capital gains is 0% (10% and 15% tax bracket). If your income is greater than $69,000, the rate is 15% (25% tax bracket and above). Capital gains tax rates have not been this low since 1933. These rates will continue until the end of 2012. Without changes to the tax law by Congress, the top rate will increase to 20% beginning in 2013 (6).

As an illustration, let’s say that you bought 60 acres of land at $1,000/acre and are considering selling it for $2,000/acre (and you have owned the land for 5 years and your taxable income after deductions and exemptions for income taxes is less than $69,000), the land sale creates a long term capital gain of $1,000/acre. So, there is a total capital gain of $60,000 (60 acres x $1,000/acre). If you sell the land in early 2012 and receive 100% of the proceeds before the end of 2012 and your taxable income for income taxes is less than $69,000, you will pay no federal income tax on the capital gain. If you have $68,000 of taxable income and $60,000 of capital gain you are only paying income tax on the $8,000.  How can this happen? That $60,000 of capital gain is tax free because you are in a lower tax bracket (up to the top of the 15% bracket). Keep in mind that this is only effective under current law, which expires at the end of 2012.

Selling Dairy Business
These tax rates can be very beneficial to someone considering exiting the dairy business. Let’s use the example of the above mentioned 50-head cull cows sold for a total of $65,000. If that dairy couple has taxable income in 2011 of less than $69,000 (income after exemptions and deductions), they will pay no income tax on the $65,000 of raised cow sales. If they sell raised cows with a total value of $100,000, they will pay $0 tax on the first $69,000 and a tax rate of 15% on the remaining $31,000, or $4,650 in income tax. In this example, they can sell $100,000 of raised cows and pay $4,650 of income tax on that sale. That is an average tax rate of 4.65%. 

Unless Congress changes the tax law, the long-term capital gains rate (used for raised, cull cows that are sold, for example) increases to 10% from 0% and to 20% from 15% after 2012. These examples are for educational purposes only. Consult a qualified tax or investment professional before embarking on capital purchases or the sale of capital assets. 

If you have any questions or need any additional information contact your local Michigan State University Extension Farm Management Educator or the author, Curtis Talley, Jr., Farm Management Educator talleycu@anr.msu.edu; phone:  231-873-2129.

1. Gary Taylor “2020 Vision for Agriculture” presentation at Chicago Agriculture Summit, December, 2010.
2. Ibid.
3. Jeff Conrad, president of Hancock Agricultural Investment Group, presentation to Global Ag Investing Conference, 2011.
4. Gary Taylor “2020 Vision for Agriculture” presentation at Chicago Agriculture Summit, December, 2010.
5. Mortgage Intelligence May 11, 2011.  
6. Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.   


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