As farming parents prepare to retire, conflicting viewpoints can arise with their offspring over keeping the land or selling it. What’s the right way to go? Deciding whether to retain versus divesting the family farm may be the biggest decision that any farm family will ever have to undertake.
There’s no right or wrong answer, say experts like Erich Weber, business finance specialist with the Ontario Ministry of Agriculture, Food and Rural Affairs. Instead, it depends on your family and your specific circumstances.
In fact, the only universal recommendation that applies in every situation is that the sooner you reach out to your accountant and lawyer, the sooner the family can start thinking about their real options instead of what might just be pipedreams.
“Your accountant and lawyer will be able to walk you through the different processes a family must undertake if they decide to keep the farm in the family or decide to sell it,” Weber says.
In fact, it may never have been more important to get top quality advice because of the myriad changes in this year’s federal budget, as well as legislative changes.
Parents in particular will have to navigate through numerous questions to come to a final strategy, says Allan Sawiak of Kingston Ross Pasnak in Edmonton, Alta.
Key questions will include:
• How much tax will you pay? What steps can you take to minimize the tax bill?
• How much cash will you need for the kind of retirement you deserve?
• If you keep the land, how much rent would you collect? And how does that fit in with your annual living costs, with a top-up for unforeseen circumstances, such as a nursing home?
• Is the current price of the land acceptable to you?
• Do your kids get along, or would shared farmland become a source of conflict? Should you sell in order to simplify the estate and keep family harmony?
• Do the kids need financial help? And do you want to see your kids and grandchildren enjoy some of the money?
Keep or sell
Weber says parents or their offspring may wish to keep the farm in the family in order to provide farming opportunities for future generations. High land prices are a huge barrier to farmers starting out, which means that if the farmland remains in the family, succeeding generations have a big advantage, and may be more apt to keep the business going.
Another option is keeping the property, but renting.
“Depending on the size of the farmland base, rental income can be significant, and help the next generations live,” says Weber. “But there are income taxes and other tax implications — [like] eligibility of the lifetime capital gains exemption for a future sale of the land — that would need to be kept in mind.”
Should parents continue to own the farm and transfer it to their offspring sometime in the future, both sides will need to determine who pays ongoing property taxes, upkeep, and capital upgrades, he says.
“These are just some of the questions that should be discussed with the parents and the kids if they decide to keep the property,” says Weber.
Reasons to sell the farm include generating proceeds the parents need to retire on, and/or simplifying the estate’s division.
“It can be more difficult to split a parcel of land for more than one child/beneficiary compared to if the land was sold, and the estate was just cash,” says Weber.
Sawiak adds there’s less chance of any hard feelings between offspring when they receive cash, for there’s no longer a farm to fight over.
Most farming parents have been kicking the numbers around for years. In a way, they’re ahead of the game. But in the real world, with real family dynamics, the question can be harder. How much more does it have to pay if you hold onto the farm and it becomes a flashpoint inside the family, compared to selling the farm and just moving on?
It’s also important to put first things first. There’s no sense in making transition plans if parents aren’t well taken care of, says Colin Sabourin, financial planner and investment advisor with Winnipeg Financial Planning.
Sabourin is blunt about it. It’s not up to the kids to make the decision about keeping or selling the farm.
“It’s Mom’s and Dad’s land, and they should focus on themselves first, and on what they need for their own retirement, and they should make decisions based on that,” Sabourin says.
Tax implications also require weighing.
Farm parents who decide to keep their land avoid the alternative minimum tax (AMT), says Sabourin. He describes AMT as a tax imposed on those who have a high total income, but, because of the capital gains exemption, have a low taxable income.
“People sometimes think that selling farmland is a tax-free event due to the capital gains exemption, but there is an AMT tax that comes into play,” he says.
The AMT can be recovered, as long as enough taxable income is generated over the next seven years, but it can’t be regained after the retired farmer dies, Sabourin points out.
Another loss would be Old Age Security. If the parents sell their farmland, it would generate a capital gain that would increase their net income, which is what OAS is based off of, he says.
More significantly, if there are any gains over and above the capital gains exemption, they would be taxed, Sabourin says.
One way not to pay that tax would be for the farm parents to transfer their farm to their children and use up their capital gains exemption. As long as offspring hold onto the farm for three years, they can sell it and use their capital gains exemption.
The risk there is you have to trust your kids to pay you back, Sabourin says.
Sawiak stresses the importance of seeking estate tax advice from professionals who work in the area of farm taxation.
“I still come across situations where tax planning was not done properly, mostly because the wills were completed many years ago, and not reviewed by a tax professional with significant experience in farm taxation,” Sawiak says.
Adds Weber: “There are tax strategies that can help reduce any tax burden related to intergenerational transfers of farm land. Consult with your accountant.”