In the last column, I mentioned that I would be discussing the review of assessment methods for farm property buyouts or equalization. Many things need to be coordinated in an estate plan. Two of these elements include who gets the assets and how they will be valued. I have included a table which I will be referencing for this article. This publication represents a wide range of property values, so you may need to adjust to some of the values specific to your area. Let’s compare four different ways to evaluate land:
Use fair market value. This amount will be determined by an appraisal when someone dies. It can be a scary option. The words “fair market value” may be less accurate than their name suggests. In our area, there is still land between $8,000 and $10,000/acre. That figure may not be fair to the farming heir because $7 worth of corn got land at that price and now corn costs less than half that price. In the 1980s, when land values crashed to $600 an acre, it might not have been fair the other way around. Look at the chart for a $9,000 plot. (For the chart, I assumed 5% for 20 years for all payments) The payment is $720/acre and it does not generate cash flow. Mom and Dad may have taken 40 years to accumulate this land and now refinancing it at today’s prices would be next to impossible.
The second option is a percentage of fair market value. In over 20 years of practice, I can tell people who have used this option that the range was 30-95% FMV, with the most common being 70-80%. That sounds good, but if you have $9,000 land and a 25% discount, you’ll have a land payment of $540/acre. Remember that the payment will be approximately 20 years after the death of the parents. Ouch! If there is no cash, do you really have a viable plan?
- The third option is to simply set a price. Some farming parents and heirs say, “I don’t like moving targets, let’s set a number that we think will work.” For this example, I chose $4,000, which would correspond to a payment of $320. It’s not a cakewalk, but it sounds a little better and it’s something that could be planned. Someone might complain that it doesn’t take into account inflation or other things that may or may not happen. I think it’s ironic when you buy land from a third party everyone is willing to set a price but when a price is set within the family somehow setting a price isn’t fair ?
- The fourth option is to use a special purpose assessment. Some may have heard of IRS code 2032A, which uses the five-year average rent rate and subtracts the property tax for your area and divides that total by a factor, which is currently 0.0468. For example, land that has an average cash rent of $250 and a property tax of $30/acre would be valued at $4,701/acre. However, if the rent goes up or down, the price will adjust to reflect the value of the land for farming purposes.
There are many ways people use these different ideas and combinations of these ideas with “not to exceed” price clauses that may reflect your best attempt to achieve the goals you have. I should also note that we have a website called www.farmestategps.com Check it out for additional online tips, tools and strategies that may be very useful to you in the future.
Myron Friesen is co-owner of Farm Financial Strategies Inc. in Osage, Iowa. He can be reached at 866-524-3636 or firstname.lastname@example.org.