Don’t Make These Mistakes the Next Time You Buy Land

When the rare opportunity arises to buy farmland — arguably a farmer’s most valuable asset — what are some things to keep in mind? Three experts offer their advice to streamline the land-buying process. 

Organize Your Finances 

Curt Covington, senior director of managed accounts at AgAmerica, said, “Your accountant and lender will thank you” for having your financial records in order. He said it’s important to have on hand an up-to-date balance sheet and other key financial documents such as tax returns, bank statements, equipment lists, and yield sheets.

“Lenders ask for information, and they ask for that information for good reason, so providing it to them properly and not in a drip, drip, drip approach is what lenders expect,” Covington said. 

He also added that showing trustworthiness as a borrower is a key component in the lending process. 

“I’ll do business with a borrower that I have complete trust in, even if their financial records aren’t where they should be,” Covington said. “So character absolutely matters, because if you have character, I know you’ll do everything possible to repay my loan in a timely fashion.” 

Prepare for Tax Responsibilities

Kristine Tidgren, director of the Iowa State University Center for Agricultural Law and Taxation, explained what tax implications to keep in mind when buying land. She said besides the value of the land, make sure to understand the value of certain assets on the land. 

“We have to be really careful when we buy farmland that we are properly allocating the purchase price to the fair market value of the different assets we are buying,” Tidgren said. The reason, she said, is some assets, such as drainage tile and fencing, qualify for Section 179 or depreciation deductions, whereas the land itself is not depreciable. Having proper documentation to justify assigned values is essential for a possible IRS audit, according to Tidgren. 

“The mistake people make is that they often don’t document well, so they don’t have a justification for why they assigned $100,000 to the drainage tile or X amount of dollars to the fence,” Tidgren said. “They did not do their research at the time they assigned a value, and the IRS may challenge that.” 

Tidgren emphasized that the best evidence of value is if the buyer and seller come to an agreement in the sales contract on the values of the various assets. She said this provides “pretty solid evidence” in the case of an audit. However, Tidgren said the two parties often have differing incentives when assigning value to assets. The seller wants to minimize the value of non-land assets. For example, Tidgren said, “If they sell drainage tile they have depreciated, they’re going to have to pay recapture tax at the ordinary income rate on the gain; otherwise, farmland is generally taxed at capital gain rates. So there’s an incentive for the seller to keep the value of the drainage tile low, and there’s an incentive for the purchaser to make it higher.” 

Tidgren also noted a particularly hot-button issue is assigning value to excess fertilizer on purchased land. She said this is an area with very little guidance, since the IRS has issued only one memorandum from 1991 on the subject. 

“While it may be reasonable to take a deduction corresponding to the value of the unexhausted fertilizer in the soil, in some cases, it appears the buyer is attempting to go beyond this to deduct the value of all soil nutrients, something that is not allowed under the tax law,” Tidgren said. “In these cases, I think there’s a lot of risk of the IRS saying, ‘No, it’s not reasonable that you could take a $5,000 per acre deduction for excess fertility.’” 

This is why Tidgren advised having proper documentation to justify assigned values in the instance of IRS auditing, and to work with an experienced farm tax professional before and after the land purchase.

Accurately Estimate Land Value

Covington said farmers may misjudge a parcel’s value by overlooking factors such as soil quality and location, and relying on older appraisals and outdated USDA land value studies. 

He said because land prices have steadily climbed over the past decade, farmers have come to expect ever-growing values, and in the long term, that is typically the case. However, there can be short-term fluctuations in data, so it’s important to look at the most updated information to assess current land value. For example, the 2024 Iowa State University Land Value Survey concluded the average value for farmland in the state decreased by 3.1% year-over-year.

“Over the last 18 months, we’ve seen land values begin to moderate, with noticeable declines in some regions due to low commodity prices and high interest rates — both of which directly impact land values,” Covington said. 

Steve Bruere, president of People’s Co., an integrated land solutions firm headquartered in Des Moines, Iowa, offered a slightly different view. He agreed it’s important for farmers to understand the value of land they may purchase. 

He said, in his experience, they typically know the value of the land but may strategically buy land for more than what is “economically justified.”

“The time to buy a farm is when somebody wants to sell,” Bruere said. “Sometimes, interest rates and commodity prices aren’t ideal at the time, and sometimes, you’ve got to pay more than what the economics will support. But if you’ve got a long-term horizon, more likely than not, you’re going to be glad you did.” 

Bruere said that in a competitive land auction environment, where only a small amount hits the market on an annual basis, a buyer sometimes has to “step up” and pay for generational assets. 

“Anybody you talk to who bought a farm 10 or 20 years ago is really glad they did,” Bruere said. “As long as you’ve got the financial ability to withstand the short-term pain of getting into the farm, then you’re likely going to be happy.” 

However, Bruere also cautioned that it’s important to ensure that any overpayment is a business decision rather than an emotional one. It’s important to consider additional investments the land might require such as putting in a new fence or fixing a ditch. 

“Somebody told me once, ‘Don’t fall in love with something that can’t love you back,’ and farmland is one of those assets that people make emotional decisions on,” Bruere said.