If you’ve ever wondered about owning farmland with your Individual Retirement Account, the answer is you can. Of course, it’s not without strings attached. Here are the considerations:
- You must purchase the land with cash sitting in the IRA.
- You cannot borrow against it.
- You cannot personally manage it. An asset manager, such as a farm manager, must be employed so you are hands-off.
- You do have the choice of leasing alternatives, such as cash rent or custom-farming. As noted, you will be hands-off on the management.
- Profits are re-invested within the IRA.
- It must be valued annually. This can be done by an appraisal or possibly by a cheaper option, a broker’s opinion of value.
- You must have a custodian for the overall IRA account.
- You will incur annual fees for the custodian, manager, and valuation.
- At an age designated by IRS (currently 73), you will begin withdrawals as a percentage of the overall IRA value.
- For example, a required withdrawal of 5% on a $2 million IRA would be $100,000 per year. That withdrawal may come from your farm operations or from other cash resources held within your IRA account.
The main drawback we see is if you do not have the funds to meet the required withdrawals when that time comes, you will need to liquidate all or part of the farmland to make the withdrawal. Other assets, such as stocks, are easier to sell incrementally.
This seems to work best for those with a diversified IRA portfolio so real estate is not an overwhelming portion, and for those with a longer time line so the non-real estate portion can grow sufficiently to meet future withdrawals.
Bottom line is this can be a good diversification tool for those who prefer to include income-producing real estate within their IRA. For further information, it is best to consult with your tax advisor.
