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Serving: IA
Farmstead, barn and silos with cornfield in foreground. Rod Swoboda
SELLING THE FARM? Contact a tax adviser and design a strategy to liquidate your assets in a way that can minimize the tax impact.

Land auctions learn to navigate COVID-19

Timely Tips: Do online auctions or in-person sales get more bidders?

Members of the Timely Tips panel are Alejandro Plastina andWendong Zhang, Extension economists, Iowa State University; Leslie Miller, Marion County Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa.

My wife and I have farmed 45 years and are retiring at end of 2020. We own 1,500 acres of cropland and farm equipment. We want to sell both the land and machinery by auction. We contacted a farm real estate agent. His firm has conducted auctions this year with both online and live bidding. He says there has been a significant increase in online bidders with social distancing and shelter in place to avoid COVID-19. His company restricts live participation (in-person attendees) to bidders only and they must register ahead. What advice do you have for us as to how we should prepare for holding our sale? What questions should we be asking the agent? 

Zhang: There are some standard questions, such as who are the auctioneers handling your auctions and are they licensed? What is the real estate agent’s opinion on market value for your parcels based on similar properties sold in your area? What are their suggestions on the reserve prices set by you? Will and how will the company arrange tours of the properties for potential buyers? Could someone in your family or on your behalf bid the parcels? Also, how do they plan to segment the parcels in auctions, and how the combination of land and equipment change the auction process?

The online auction format and social distancing requirements now also invite several new questions: How have the makeup of buyers and market trends changed when they moved to an online auction format? How do they market and advertise your properties when people drive less and stay at home?

Stout: You could be setting yourself up for a huge tax bill, especially if you sell both the land and machinery in the same year. With the assets you have, you should have no trouble paying the capital gains taxes, but you might want to talk to your tax accountant before you set an auction date. One way to spread out the tax liability would be to sell the land one year and the machinery the next, or just sell part of the land. Another method is to sell the land on contract, which enables you to spread the tax liability over several years.

I think you will have no problem getting bidders to an auction, COVID-19 or not. The last comparison on land prices I saw was down 2.7% this year, probably due to the virus’ effect on the prices for commodities. In looking for a real estate agent, find one with a good reputation, and talk to others who has used this person in the past to find out if they were satisfied. Often, the auction company can give you an approximate appraisal of what it would expect the land and larger pieces of machinery to sell for. Make sure the machinery is cleaned up nicely and in working order. Good luck in your retirement!

Miller: There is a reason for the old saying, “In this world nothing is certain except for death and taxes.” So I recommend you contact a tax adviser or your attorney, and design a strategy to liquidate your assets in a manner that can minimize the tax impact. Unless you have an immediate and pressing need for a large sum of cash, I am certain they would advise against selling your machinery and land in the same year.

If you decide to sell machinery and land in separate tax years, then you should sell your machinery first and rent out your farmland for a year. Plus, if you hang on to your farmland, you can rent it for more than your money would earn in a time deposit at a bank.

In Iowa, it appears there is more experience with online auctions for machinery vs. real estate. (Mostly because there are more of them scheduled ,and they are publicized over a wide area.) However, I believe most auction companies have now garnered experience with online bidders for both real estate and machinery.

Your best benefit will come in talking to several auction companies. Find out their commissions and their costs for no sale items. Find out if their commission covers advertising costs and the cost of drawing up the purchase agreements on land. Then go online and see if your preferred choice has held many sales in the last four months. If not, then I would look for an auctioneer that has conducted auctions in the last four months. They will probably be the ones with the most experience of selling in the current environment.

Should cover crops be included in leases?

Who pays for seeding cover crops: the landlord or tenant? Should this be specified in a written lease? More and more landlords are asking tenants to grow cover crops. I think the landlord should pay for the seed and the planting of the seed because it is going to improve the quality of the land and help keep soil on the field. The owner of the land is the one who benefits. 

Stout: As a longtime cover-cropper, I agree with your statement that cover crops improve the soil health and decrease erosion. However, not all landlords see it that way. I have seen leases with nothing stated about cover crops, and one that specifically stated they could not be planted.  I have heard about leases where the landlord pays for the seed and ones where the tenant pays. So there is really no standard at this time that I know of on sharing costs.

If the landlord requires cover crops, then he or she should at least pay the seed cost and maybe even share the seeding expense.  As you say, the landlord is getting a long-term benefit, whereas the tenant may not see a return for a few years. At this time, it seems to be a negotiable item between each landlord and tenant.

Plastina: There are many different arrangements on who gets to pay what when it comes to cover crops in leased farmland. Even before deciding who pays what, it is important that landowner and tenant have a discussion on the potential pros and cons of cover crops in each field, whether uncertain long-term benefits justify the certain cumulative annual costs, and how each party can benefit from this practice.

Cover crops can build soil health and mitigate soil erosion, improve water retention capacity, and in some cases even reduce compaction. Some long-term studies have shown that cash crop yields might also improve after many years of cover crops. Multiple government programs are available to reduce the final cost of implementing the practice. However, even when cover crops are a great fit for a specific field, it can take a few years for the farmer to fine-tune the practice, and yields might end up being lower than without cover crops over that period.

Finally, if cover crop planting is late or winter temperatures come earlier than expected, then the development of root system and aboveground biomass could be curtailed to a point where no agronomic benefits will accrue from cover crops.

In summary, pros and cons vary substantially across farms, and a detailed conversation between landowner and tenant is critical for both parties to understand each other’s expectations about cover crops. However, irrespectively of the logic behind the use of cover crops, it is imperative that, if required, the practice be included in the written leasing agreement, with as much detail as possible.

Iowa State University Extension published a “Lease Supplement for Obtaining Conservation Practices to Control Soil and Nutrient Loss” (Ag Decision Maker File C2-08) that can be used as a template to develop a detailed leasing agreement. It is also important for both parties to communicate at least annually about the implementation of the practice, and the Farmland Lease Annual Report (Ag Decision Maker File C2-06) published by ISU is a great tool to enhance communication between farmland owners and producers.

Miller: Generally, tenants with livestock that winter-graze the cover crops have a better chance of financial return on the cost of planting cover crops. In row crop operations, it may take several years to realize any yield benefit, which means it would be preferable for the landlord to pay for the cost. Currently, there is not enough cover crops planted on rented land to claim there is an “established practice” for who pays the cost of those cover crops.

It might be possible to talk to your landlord about revising the rental agreement so cover crops are included, with a clear understanding of who pays the costs. It may be possible to protect yourself from the out-of-pocket costs of cover crops with a reimbursement clause. For example, if the landlord offers to pay for the cost of seed but has the tenant pay the cost of planting, then the landlord should reimburse the tenant 100% of the cost of planting if the landlord terminates the lease.

There are some great websites that outline the costs and benefits of cover crops. Find them at:

 

 

 

 

 

 

 

 

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