Each month in Wallaces Farmer magazine, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa. 

My cash-rented farmland was severely impacted from spring flooding. The tenant will receive prevented planting payments for 2019, but these are almost equal to the cash rent. As a landlord, what can I do to help the tenant’s cash flow concerns and motivate the tenant to help with land restoration?
 
Stout: One of the best things you could do to help with land restoration is to insist that he seeds a cover crop on the prevented planting ground. You could offer to pay for the seed as a goodwill gesture, and maybe even the seeding cost. 

Having a cover crop growing will achieve many things for your land. It will help reduce erosion, help with weed control, improve soil structure and prevent fallow syndrome, which otherwise might reduce next year’s yield. I suggest cereal rye, winter wheat or winter triticale as they will overwinter and continue to provide protection from erosion, and aid in weed control on into next spring.

Also, consider adding a legume that would add nitrogen for next year if corn is to be the crop planted in 2020. If soybeans are to be the 2020 crop, maybe add a brassica such as tillage radish or turnips to the mix. Their roots grow deep and alleviate some compaction by 2019’s heavy rains.
 
Plastina: The first step to help your tenant and your land recover from spring flooding is to communicate clearly and frequently with your tenant during these tough times. Communication will help you understand each other’s needs and share information on upcoming disaster aid programs and conservation programs. 

As of mid-June, USDA pledged $3 billion in aid for farmers with qualifying losses in a federally declared disaster area. Also, USDA is exploring legal flexibilities to provide a partial Market Facilitation Program payment to farmers who filed prevented planting and chose to plant an MFP-eligible cover crop with the potential to be harvested. USDA has not yet defined what counts as an MFP-eligible cover crop. 

Some Midwest states are exploring ways to expand the pool of resources available to cover crop seeding through state-sponsored cost-share programs. 

You as landowner will have a one-time opportunity to update payment yields for USDA’s Price Loss Coverage program later this year, and by so doing, it might help provide your tenant a more robust safety net starting in 2021. 

A farmland leasing agreement can be modified in any way at any time as long as both landowners and tenants are willing to sign a new contract. This flexibility can be used to incentivize your tenant to implement conservation practices in your farmland in exchange for better leasing terms, or a direct monetary transfer.  

Miller: If the prevented planting payments are “almost equal” to the cash rent, it sounds like the tenant is losing cash on every acre along with having fewer acres to cover machinery costs and living expenses. So, taking the prevented planting option could be quite damaging to the operator. 

Conversely, I’ve read some writings by legal experts this spring that indicate a cash rent lease covering flooded and damaged ground may have terms that allow the tenant to vacate the premise and not make any lease payments, which would be hard on the landlord. 

So, the real question is: “What is fair to both landlord and tenant?” The answer to that should probably come in a face-to-face, number-crunching conversation with your tenant. 

The University of Nebraska Extension Service issued some practical guidelines for people to consider as they negotiate lease terms and the cleanup process. They suggest both sides consider that there are two types of cleanup that need to be done. One type is removal of branches, trees, piled-up residue and strung-out fencing. Most tenants can perform these duties, but it involves a lot of hard work and physical labor. The tenant shouldn’t be expected to do this for free, so rent reduction could be a good incentive. 

Some cleanup work can only be done by a bulldozer. The landlord would be expected to pay for that expense, which could be done from cash rent proceeds — either 2019 or subsequent years. 

Transitioning into farming

I need advice in transitioning our 30-year-old son and daughter-in-law into our farming operation. He has a full-time job off the farm. I’m 65 and own 200 acres and cash-rent an additional 170 acres of cropland. For the last four years, my son has helped when he can with fieldwork, and he’s handy in the shop. My machinery inventory is a little over $100,000, as I hire the harvesting and spraying. 

I’m looking for ways to work my son into the farming operation while he keeps his job, and I can provide some labor with crops. What about rent-to-own options? How do they work? My accountant mentioned “gifting” some crops and machinery to our son for tax purposes. How does that work? 

Most of our son’s current salary goes to his family household expenses and house payment, so he’s basically starting his farming career from scratch. Thanks in advance for any advice you have for us. 
 
Stout: It depends on your financial situation as to how much you can do in transitioning the operation to your son. You and your wife can each gift up to $15,000 to both your son and daughter-in-law each year, so that means you could gift a total of $60,000 to them. Check with your accountant, as this could probably work with gifting grain as well. It might be a little more tricky with gifting machinery. 

If there is a gain in the value of the property since it was purchased compared to the time it was gifted, there may be tax consequences. As I understand rent-to-own, it would be looked at as a sale, with the rent payments going toward the purchase price, so check with your attorney and accountant before you enter into that, as it would have similar tax implications.

Zhang: Federal tax reform has raised the limit for unified credit to $11 million per person and $22 million for a couple. You could gift both the crops and machinery to your son and daughter-in-law. You could make up to $60,000 in gifts and claim the remaining $40,000 as part of your unified credit for estate and gift tax. You’ll need to fill out an IRS 709 form. The recipients tax basis is the same as the donors. ISU Extension Ag Decision Maker has more resources at its website.

The rent-to-own option could be risky because it could be treated as a contract sale, which would require you to recapture all of the depreciation in the first year of sale. Reach out to one of the eight ISU Extension Farm Management field specialists for guidance. 

Miller: In general, farms having the most financial difficulty today are the multi-generational operations. An operation that works well supporting one family may struggle when it tries to divert income or assets to a second family. So, it might be best to “work him in” by finding some land he can rent for a reasonable price and letting him use your machinery to put the crop in on his rented acres. This will result in some extra machinery costs for you. If those costs are too much, your son could partially compensate you for the use of your equipment.

The benefit of helping your son with a separate tract allows him to have “real” farm income and file a Schedule F when he does his taxes. (Schedule F will be important if he wants to use any of the Farm Service Agency programs for beginning farmers.) Another, more important benefit is it gives your son a chance to learn management and marketing skills from you while you work side by side. That way, when he is ready to buy the home farm from you, you know he has the business training he needs to be successful.