Renting vs. owning land: What are the tax benefits?

Renting vs. owning land – which is the better option? This has been a hot-button question in agriculture lately and, while there are many benefits to both sides, the differences between the tax benefits are rarely discussed.

Let's break down the tax-deductible opportunities for both.

Owning Land

Property Taxes

All property taxes from farmland are tax deductible; however, this does not include property taxes from a house or land with a home on it. To determine the amount of property taxes that are tax deductible for an operation, one must compare the value of the home with the value of farmland.

Interest

Neither the principal payments on a farm real estate loan or the down payment for the purchase are tax deductible. That said, interest payments incurred on the loan are. Interest paid on equipment or operating loans is also deductible.

Land Improvements

Owning farmland means being responsible for the quality of the land. Any operating expenses put toward improving the property are tax deductible. Depending on your state, examples may include tiling a field or fencing off pasture ground, with some limitations.

Renting Land

Rent

Unlike farmland loan payments, when renting land, you can use the entirety of the rent amount as a tax deduction. A rent payment typically includes the property taxes for the ground and the cost of the privilege to farm the land.

Interest

If an operating loan is used to pay for the rent payments for the land, the interest incurred from the loan is also an eligible tax deduction – double-dipping in a sense. This again applies to equipment loans or other operating expenses needed, depending on the rental agreement.

While owning land allows for more tax write-off possibilities, renting may allow you to write off larger amounts. Rental agreement restrictions and responsibilities, homeownership on properties, and required land improvements should all be taken into consideration when choosing your land management route. So, how to answer this question of renting vs. owning? It's simple: There is no clear answer. There are many tax benefits and deduction opportunities available for both renting and owning. The best option is the one that benefits your operation the most.

Disclosure: Jaques is a licensed real estate broker in nine states, not a CPA or attorney. Please seek professional advice before making tax or legal decisions.

FarmlandFinder digitizes farmland transactions and makes farmland real estate transparent and accessible to everyone. Jaques oversees the farmland marketplace and real estate compliance as the head of real estate.