Purchasing crop land is a big day for any farmer – young or old, seasoned or new. You probably do a lot of research on the ground when you purchase it by looking at field maps for soil types, drainage, and property lines.
Here’s something you may not know: These maps are just as important after you purchase the land, because there are costs that can be depreciated as land improvements and decrease your tax liability.
Consider this example
You just purchased 80 acres of decent land. You have to take out a loan to cover a good portion of the costs, but you had funds to make a $100,000 down payment. The land cost was $11,800 an acre; with roughly 303 ft. / acre of 6” tile and 7,467 ft. for fencing around the perimeter.
For our purposes, we are estimating costs of $1.65/ft. for tile and $1.90/ft. for fencing. You can make estimates on the value of the tile and fencing for depreciation purposes.
There are a lot of variables that need to be considered when estimating depreciable land cost; namely the age/wear and replacement cost. I would recommend that you discuss the rationale for estimates with your tax preparer and/or CPA; they are estimates, but you will want to keep them reasonable.
The journal entry for our example is going to look like this:
In effect all we did was take the total value of the land - $944,000 – and allocate our estimated cost to land improvements. The credit side of the entry is our down payment and remaining cost covered by the note. By allocating the cost of the land, we now have $54,187 of depreciable costs to decrease our tax liability. You can depreciate the tile and fencing over time or expense in the first year using Section 179.
Having the information to allocate reasonable cost for land purchases is key for managing taxable income and maximizing the return on your investment. If you have a farm that you are looking at purchasing or have a growth plan, make sure to bring it up the next time you talk with your CPA. They can help you go through the information you have and will need to maximize the tax benefits of your new investment.