WE BOUGHT A FARM earlier this year. We already have a greenhouse business, where we grow flowers, as well as several small tracts of land. The purchase was part of our farming plan, which involves expanding our crop business as opportunities arise.
But buying a farm is also part of our estate plan—and our fishing hopes. We now have two ponds with fish. True, they’re very small fish, as far as we can tell from three afternoons of fishing, but we have hopes.
Farm real estate is an interesting investment. From a cash flow basis, farms don’t have much to offer. If we’re lucky, our new farm will have an annual cash return, after all expenses, of around 2.5% on our initial investment. That’s worse than a certificate of deposit at the local bank, and our investment certainly doesn’t come with a government guarantee. That said, the government does have an interest in farming, and various subsidy programs tend to smooth the cyclical nature of farming.
According to the Department of Agriculture, farmland values in Missouri have appreciated at an average 6% a year since 1950. A survey by the Kansas City Federal Reserve found that farmland values in Western Missouri, where I live and farm, went up 17% in 2022. That’s unsustainable, and farmers as old as I am can remember the 1980s, when farmland prices dropped 25% over the course of nearly a decade.
Will our farm make up in capital appreciation what it lacks in annual cash return? Perhaps. On the other hand, we could be at a cyclical top in farm values. But it doesn’t really matter. We won’t be selling in our lifetimes and, if our commitment and values pass to the next generation, we won’t be selling in the future.
It’s a good thing we don’t plan on selling. Farms aren’t liquid. We couldn’t sell this place quickly if we had an urgent need for cash. In fact, completing the transaction to purchase the farm was a nightmare. It was supposed to close on Jan. 30, and we finally received possession on April 14, and only then because I had negotiated an April 15 financial penalty for the sellers, who were delinquent in supplying us with a clear title. Both the nature of farm real estate and our emotional commitment to this farm guarantees that it’s an investment for the long term.
We paid for the farm with cash, after a several year period of moving funds out of my tax-protected retirement funds. I parked the money in a Roth IRA while looking for a farm to purchase. This increased our tax bill over the past few years, but it’ll save my family taxes when my wife and I shuffle off this mortal coil.
Is that a good exchange? Maybe not based solely on a financial accounting. But farmland has an emotional value to my wife and me and, to be totally honest, we’re also attempting to encourage our heirs to continue our family’s long-term commitment to farming and farm real estate.
Upon our death, the farm will be run by our children. The land will receive a step-up in cost basis, should it increase in value during the time we own it. That will protect any gain in value over the remainder of our lives from capital gains tax. We also don’t have to worry about the estate tax under current law, and we hope our planning will protect us if there’s a lower federal estate-tax exemption in the future. The value of the farmland we own at death should never be taxed again, unless our heirs choose to sell. Even then, capital gains taxes would only be owed on any gain in value after our deaths.
On the other hand, most of the rest of the value of our estate will be in IRAs. Upon our passing, our heirs will have to pay taxes on the remaining value over a 10-year period at personal income-tax rates. That may force them to sell assets from our IRAs, even if the market is in the doldrums. I can’t forecast future tax rates, but I would wager that tax rates will be higher than they are now.
I have neither the skill nor the patience to model the expected future value of the taxes we’ve paid on my IRA withdrawals over the past few years. I also can’t predict the future trend of farmland values, but I’m comfortable with the way we’ve handled the transaction. The alternative—a debt-financed purchase while keeping my cash in an IRA—would probably have made more financial sense, but I’m reluctant to take on a mortgage that’ll last longer than I will.
It was a hot and dry June, and my soybean crop on the new farm has been suffering. It may be next year before I see any cash return. Still, the bass are growing, and the grandkids have already caught a few. What’s that worth? I don’t know, but they’ll remember those bass ponds long after they’ve forgotten any money Grandpa made from a smart investment in the stock market.
Blake Hurst farms and grows flowers with his family in northwest Missouri. He and his wife Julie have three children. Their oldest daughter and both sons-in-law are involved in the family business, growing corn and soybeans, and shipping flowers to four states. Their middle daughter is the chief operating officer for a small hospital. Their youngest, a son, is a lawyer for the Department of Justice. Blake and Julie have six grandchildren. Blake is the former president of the Missouri Farm Bureau and a freelance writer. His previous articles were I’ll Take It From Here and When to Quit.