PARKER, COLO. (RFD NEWS) — Lowering tax burdens is a priority for many farmers and ranchers, but the way farmland is owned and leased can make a significant difference when it comes to self-employment taxes.
Farm CPA Paul Neiffer says farmers may be able to reduce self-employment taxes when a spouse who does not operate the farm owns farmland in their own name and leases that ground to the farming spouse.
How Spouse-Owned Land Can Reduce Self-Employment Tax
Neiffer says a common situation involves spouses each owning a portion of the farmland, with the non-farming spouse leasing their share to the spouse who operates the farm.
The lease income the non-farming spouse receives generally is not subject to self-employment tax when the arrangement is structured properly.
Meanwhile, the farming spouse can deduct the lease payment as a farm expense.
The strategy does not necessarily reduce federal income tax, but it can potentially eliminate self-employment tax on the qualifying rental income.
Proper Documentation Is Critical
Neiffer says farmers must meet several requirements to avoid having the IRS treat the rental income as subject to self-employment tax.
First, the spouse receiving the rental income needs to actually hold title to the farmland.
A written lease is also essential. The lease should establish a rental rate that does not exceed fair market value.
The farming operation should also issue a Form 1099 for the rental payments at the end of the year.
Neiffer says the rental income should be deposited into a separate account belonging to the spouse who owns the land rather than being returned to the farm checking account.
Expenses Need to Follow the Ownership
The non-farming spouse should also handle expenses associated with the farmland.
That can include mortgage interest, property taxes, and other expenses related to the property.
Neiffer says keeping those financial transactions separate helps establish that the spouse truly owns and leases the property rather than simply shifting income on paper.
Start With a Written Lease
While there are several details to get right, Neiffer says the process can be straightforward once the proper structure is in place.
A written lease is one of the most important pieces of the arrangement.
Farmers considering this strategy should work with their CPA or tax professional before changing farmland ownership or rental arrangements to ensure the structure complies with applicable tax rules.
