Individual retirement accounts can invest in many kinds of assets, including farmland and other types of real estate. The key is to open a self-directed IRA, which gives you the most variety in the properties you can own. If an IRA owns farmland, you must be careful not to spend any non-IRA money improving the land or paying farm bills.
When you open a self-directed IRA, you take full responsibility for choosing your investments and observing all the rules governing IRAs. You can own more than one IRA, so you might consider opening a self-directed account just for the farmland you wish to purchase. In this way, you can use a custodian or trustee that is familiar with real estate investments and the activities required to manage these. You cannot contribute farmland or any other property to an IRA, but you can purchase farmland with the cash you contribute and with your investment earnings.
In 2013, you can contribute up to $5,500 to an IRA, or $6,500 for individuals aged 50 and over. Depending on the size of the land parcel, it might take some time to build your IRA balance high enough to buy the land you want. Once purchased, the IRA must pay all the bills associated with the land, such as property taxes. If it’s a working farm, all the expenses and purchases of supplies and equipment come out of the IRA. The IRA benefits from any income the farmland generates as well as from the sale of the land if its price rises over time.
Unrelated Business Income Tax
Your IRA might have to fork over unrelated business income tax on farmland. UBIT is a tax on non-profit organizations for engaging in unrelated business. The IRS applies these rules to IRA's to prevent tax-exempt businesses from unfairly competing with tax-paying ones. You’ll contend with UBIT if you participate in business activity, such as working on the farm or managing the farming business. If you rent your land to sharecroppers and then lend a hand to farm operations, you’ll create UBIT. You therefore must turn over the management of the farm to a trustee, such as professional farm management company, if you want to avoid UBIT.
The Internal Revenue Service prohibits various forms of self-dealing in an IRA. For farmland, this means you cannot use money outside the IRA on the farmland, nor can any family member. You can’t buy, sell or rent the farmland to a relative. The IRA rules prohibit you from using the farmland as collateral for loans or to otherwise benefit from the farmland except through the IRA. The complex issues surrounding the holding of farmland in an IRA require expertise and experience. If necessary, consider consulting with real estate, legal and tax professionals before buying the farm.
- The Wall Street Journal: How to Buy Real Estate in an IRA
- Internal Revenue Service: Retirement Topics -- IRA Contribution Limits
- Hertz Farm Management, Inc.: IRA Investments in Farmland/Real Estate
- Internal Revenue Service: Publication 590: Individual Retirement Arrangements
- InvestorsInsight: Dos and Don'ts of IRA Investing
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