There are few certainties in life; anything can happen. But one sure thing is that you will have to deal with taxes every year of your life after becoming an adult. The best way to tackle taxes is to find ways to help reduce your tax burden.
If you’re looking to buy a ranch or already own one, we have some good news for you. Owning a working ranch comes with hard work, but it can also come with some financial benefits. Tax liability is substantially less for farmlands than residential or commercial spaces. Not only can you enjoy a beautiful property, but you can make that property produce monetary and tax benefits for years to come.
We’re here to highlight some financial benefits that you can potentially tap into for your agricultural efforts. For further advice, consult your local tax professional to determine what tax breaks you are eligible for.
Do I Qualify For Agricultural Tax?
Firstly, if you’re not currently using your ranch for full-time farming purposes, you’ll need to ensure that it still has zoning status for agriculture. Each state will have its own set of requirements for agricultural classification. For example, in Colorado, your property will need to meet at least one of their qualifications. The land in question must have ongoing ranch operations and a recent history of farm use. Alternatively, the property needs to contain at least 40 acres of forestland, with a forest management plan enacted. Other ways to achieve agricultural zoning status in Colorado include having qualified land that is permanently protected by a conservation easement or land with certain water rights, and the water is being used for agriculture or livestock. Other states may specify minimum agricultural sales or other qualifications for ranch status.
As a ranch owner, you will only qualify for agricultural tax deductions when you meet all of the requirements in your state. Failure to do so could mean a reclassification of your land zoning status.
It’s also worth noting that you don’t have to be getting your hands dirty or operating as a fully functional farm to be eligible for tax breaks. Depending on your state requirements, you can find a way to make your land profitable. There are many ways to do this, such as leasing land to a neighbor, starting a fishing lodge, renting out farm storage space, or homing beehives.
Who is Considered a Rancher?
The IRS has definitions of who it will consider a farmer or rancher versus someone who has a hobby farm. A hobby farm is a property that houses a few animals, or a small garden, that is used for personal or recreational use. To be considered a rancher who runs a business, there are a few activities that you can do:
- Have separate accounts for your ranch using different accounting records.
- Become a member of ranching or farming organizations.
- Complete and document business activities regarding the property.
- Document any capital expenditures and improvements made to the property to increase the value.
When seeking to be considered as a real ranch or farm, profit is essential. You need to prove to the IRS that you’re looking to profit off the land rather than only have it for your personal use. Write-offs are one of the many financial benefits of owning a working ranch. Several write-offs can be utilized for a working ranch when it comes to taxes, including seed costs, feed, utilities, livestock care, storage, wages, and more.
Financial Benefits of Buying a Ranch
Using your property as a working ranch or farm can be very beneficial for your financial obligation towards taxes and creating multiple income streams. State tax incentives for owning a working ranch may differ from state to state, and it is vital to discuss your options with a tax professional.
Agricultural taxes assist farmers and ranchers as growing seasons, livestock, and similar activities aren’t guaranteed. The use of your land is an important factor to consider. For example, you can deduct equipment expenses from your tax obligations if your ranch is turning over a profit. Your working farm may qualify for deductions on operating loss, depreciation, wages, stock losses, and utilities.
It’s unlikely that every inch of your land is being used up. As we previously mentioned, one way to achieve agricultural zoning status is that a percentage of your land be unused forest for wildlife conservation. In Texas, a Farms and Ranch Lands Conservation Program “protects working lands from development and fragmentation.”
You can apply for funding as a private landowner to preserve and protect your land. Areas of your land used for conservation may be eligible for a lower tax rate.
Home office expenses can be deducted, just like any home office in the city. Ranch owners who use their homestead as their primary place of residence may benefit from the following exceptions, however, it’s important to note that exemptions vary greatly by state and county:
- $25,000 on the value of your property for school district taxes.
- Up to 20% of the property appraised value or no less than $5,000 on any taxing unit.
- Up to $10,000 for seniors and disabled residents.
Ways Ranchers Can Create Income
The opportunities to earn an income on your land are endless. You may have the ability to open a hunting lodge, lease land for livestock, breed and sell livestock, plant grains, start a B&B, or offer storage space for rent. These options are just the beginning.
Keep in mind that state tax breaks will vary. While many states have similar tax benefits, it is always helpful to speak to a local tax professional.
Owning a Ranch Can Have Many Financial Benefits
Buying a ranch is an exciting prospect that comes with tremendous opportunities. Even as a secondary property where you go to escape the city on weekends, there are many ways that you can continue using the land for profit. For some, the thought of owning a large property away from urban centers is all about being able to relax. With some effort and some expert financial advice, you can also find ways to benefit financially from your ranch property.
KGA offers turn-key design and project management services for ranch, recreation property, and land owners across the United States. We look forward to learning more about your project and how we can help achieve your vision and goals.