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Retirement is more than sitting around watching neighborsRetirement is more than sitting around watching neighbors

Agrivision: Plan how you want to spend your time after farming. This will affect your financial needs in retirement.

November 16, 2023

8 Min Read
combine harvesting corn
TALK TO TAX ADVISER: As you prepare for retirement, consult with your tax adviser about the expected capital gains and income taxes due from selling equipment and crops. FRAN O’LEARY

I will turn 72 the first of the year, and neither our son nor our daughter say they are interested in taking over the operation of our farm. They are grown and have careers that do not involve agriculture. My wife and I own 1,500 acres and rent 750 acres in east-central Wisconsin. I plan to farm until I turn 75. Our only debt is $250,000 on the combine that I bought new in 2019.

I frequently get questions from other farmers who are interested in buying some of my land. No one has the cash to buy it all, but I am wondering if we should sell one-third of the land when I retire and rent out the rest to a neighbor, or would we be better off renting it all and not selling any land? It is important to us, if we sell any land, that we sell to a farmer. I want the land to be farmed, not developed. I plan to sell my machinery at auction when I retire. My wife and I want to continue living in our house on the farm. We live close to town, and we like it here. What are your thoughts?

Tom Kestell: Congratulations on your successful career as a farmer. Success offers you many options. Options, however, require you to plan and make choices on how to best move forward. Seek out and secure the services of a well-experienced and competent tax and financial adviser. Look for someone who you can explore various options with for not only your retirement planning, but also your auction planning. Also, discuss various options available to you after farming.

The first thing to look for is to secure a comfortable retirement, because you’ve earned it. Second, look out for your long-term care, because no one knows what we will face in our later years. That includes looking out for the long-term needs of your heirs and their heirs. Finally, look to any personal goals you have, such as helping a young couple get started in agriculture or setting up a scholarship for young people in your area. Many times, it does more good than we can imagine to help deserving young people, and the personal satisfaction can be more pleasing than you ever thought possible. See, think and do things that can set others on the path to success.

Sam Miller: This is a great question, and fortunately, you are in a financial situation that provides options. You likely will be able to sell your equipment at retirement and pay off any remaining debt, plus capital gains and income taxes from the sale of your last crop plus machinery. Next, you should evaluate what your living expenses will be and compare that to your income sources, including excess cash to invest following the farm exit, existing investments or retirement accounts, and land rent.

Consult with your tax adviser about the expected capital gains and income taxes due from selling equipment and crops. In addition, have your adviser estimate your capital gains if you sell land. It may make more sense to rent out the land and have your heirs sell the land with a step-up in basis. Work with your attorney to see if you can provide direction in your will that the land be sold to a farmer, and make your wishes known to your children. As you work on retirement planning, be certain to consider long-term care costs; if anything, this could trigger a need to sell land. Good luck with your plans.

Katie Wantoch: You and your wife have built a profitable crop operation over the years. Congrats on your success. The limited debt you have remaining is manageable upon sale of equipment. Many baby boomers in the U.S are approaching retirement age or are retired. For farmers, almost half of all ag landlords are age 65 or older. Many older farmers are choosing to farm longer than previous generations with improved health and longevity.

You mention that you have plans to retire, but there is no mention of your plans after that. Farming is a committed and lifelong passion, so what are you going to fill your time with in your new life phase? Retirement doesn’t have to be just sitting around and watching what the neighbors are doing. Many people decide that retirement is a time for them to do the things on their bucket lists, such as travel, volunteer or connect with old friends.

Having ideas or plans for after your retirement might assist you with determining if you should sell land to fund these plans or if you will be able to use the land rental income to finance your family living expenses. Work with financial professionals to help you sort out your ideas for the future.

Opportunity knocks 

My uncle, who is my dad’s younger brother, is 65 and plans to retire from farming. He is not married, and he wants me to buy his 180 acres of tillable land. He plans to keep the house and buildings where he lives. My wife and I own the home farm (where I grew up) with my dad. I am 47 years old. We owe $250,000 on 120 acres of cropland I bought from my uncle five years ago. We live in central Wisconsin, milk 160 Holstein cows, raise 140 Holstein-Angus crossbred cattle and own 700 acres. I rent 200 acres of cropland from a neighbor. I also owe $300,000 on a 4-year-old self-propelled chopper I bought last year.

My uncle says he will sell the land to me on a land contract for $3,500 an acre at 4% interest for 20 years. Similar land in our area is selling for $5,500 an acre. I’m a little nervous about taking on more debt, but our son, who is 20, says he is seriously considering returning to the farm after he graduates from college in 2025. Please advise.

Tom Kestell: Success in any career is seldom the result of luck or what randomly happens to people, but rather the fruits of hard work and good decisions over time. My guess is that your uncle recognizes this and wants to contribute to your successful career.

In my opinion, there is good debt and bad debt. This is a clear example of good debt. When you take on the land contract, your net worth will immediately jump $360,000. This reflects the real value of the land and the reduced price that your uncle is offering you. Also, the reduced interest and the 20-year repayment schedule keeps your cost of ownership with taxes below $350 per acre per year. This is a doable cost, where the land can pay for itself without being a burden to the rest of the farming enterprise. I would take your uncle out to eat a great meal, accept his offer, and show him your appreciation for his generosity!

Many people after retirement still want to be involved. Let your uncle know his input is always welcome, and if he has the desire to be involved in the planting and harvesting, his participation is always welcome. Good luck, and someday, pass on the good deeds of your uncle — perhaps a scholarship in his name at a local high school could be a meaningful tribute to his legacy.

Sam Miller: On the surface, this appears to be a great opportunity. You have the ability to buy the land at a discount, and the debt service would not be overly burdensome. With equal principal payments and the other terms you mentioned, debt service would be about $315 per acre. Add real estate tax to this amount and compare to land rent to get an idea about how much of a premium you are paying over rent. Keep in mind, you would have instant equity in the property and any future land appreciation to gain from this purchase. I suggest seeking advice from your tax preparer to see if you have any tax obligations for buying this land at a discount.

Lastly, if you are concerned about the additional land, you could drop your rented land and replace it with this purchase. If your son does not come back into the operation, you could always resell the added land and shrink your operation.

Katie Wantoch: Renting farmland is typically cheaper than purchasing land. Many beginning farmers choose to rent land so they can purchase equipment, livestock, crop inputs, etc. However, renting land often involves a short-term contract, such as a one- or five-year lease. A one-year lease doesn’t provide you much time to add value to the land, such as improving soil fertility or investing in a perennial crop.

It sounds like your uncle is willing to provide a “land contract,” which is often used as a generic name for any land installment sale where the buyer makes payments to the seller over time. In this arrangement, you as the buyer agree to purchase the property over time by making regular payments to your uncle, who retains legal title to the property until the land contract is fully paid off. After the final payment is made, your uncle will sign the deed over to you. If you would like to add value to this land and are seeking more favorable interest rates, then purchasing this land might be in your best interest.

Agrivision panel: Tom Kestell, dairy farmer, Sheboygan County, Wis.; Sam Miller, retired managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, statewide Extension farm management outreach specialist/professor of practice. If you have questions you would like the panel to answer, send them to: Wisconsin Agriculturist, P.O. Box 236, Brandon, WI 53919; or email [email protected].

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