Investing in farmland can be an attractive way to diversify a retirement portfolio beyond traditional stocks, bonds, and mutual funds. For investors interested in owning tangible assets, a Self-Directed IRA (SDIRA) can provide a way to purchase and hold certain types of real estate—including agricultural land—within a tax-advantaged retirement account.
Farmland has several characteristics that may appeal to long-term investors. It is a finite resource, can generate income through cash rent or other agricultural leases, and may appreciate over time. A Self-Directed IRA gives investors the opportunity to potentially participate in those benefits while keeping the investment inside a retirement account.
However, purchasing farmland with an SDIRA is significantly different from buying farmland personally. The IRS has strict rules regarding how retirement-account-owned real estate can be purchased, managed, used, and sold. The investment must be made for the benefit of the IRA—not for the personal benefit of the account owner.
Understanding the rules before purchasing agricultural land is essential. Investors considering this strategy should work with an experienced SDIRA custodian, tax professional, and other qualified professionals familiar with real estate and agricultural transactions.
What Is a Self-Directed IRA?
A Self-Directed IRA is an individual retirement account that allows the account holder to invest in a broader range of assets than many traditional IRA platforms offer.
A typical brokerage IRA may provide access primarily to stocks, bonds, mutual funds, and exchange-traded funds. A Self-Directed IRA can potentially hold alternative investments such as:
- Real estate
- Farmland and agricultural land
- Commercial property
- Private businesses
- Private equity
- Certain precious metals
- Private loans and other alternative investments
The important distinction is that an SDIRA does not mean the account owner can invest in anything they want without restrictions. The investment must be permitted under IRS rules, and the account must be administered through a qualified custodian.
For farmland investors, an SDIRA can provide a way to hold agricultural real estate as a retirement asset rather than purchasing the property personally.
Can You Buy Farmland With a Self-Directed IRA?
Yes, farmland can generally be held in a Self-Directed IRA, provided the investment complies with IRS rules and the SDIRA custodian permits the investment.
This can include certain types of agricultural real estate such as:
- Row-crop farmland
- Irrigated farmland
- Dryland farmland
- Pasture and grazing land
- Agricultural acreage leased to a farmer or rancher
- Other qualifying agricultural real estate
The key requirement is that the property must be an investment for the IRA. The account owner cannot use the property for personal purposes or structure the transaction so that they or certain related parties receive an improper personal benefit.
For example, an investor could potentially purchase farmland through an SDIRA and lease that land to an unrelated farmer. The rental income would generally go back into the IRA rather than directly to the investor.
How Does an SDIRA Farmland Investment Work?
The basic process is different from a conventional farmland purchase because the IRA—not the individual investor—owns the property.
A simplified example might look like this:
- An investor establishes or uses an existing Self-Directed IRA with a qualified custodian.
- The investor identifies a piece of farmland that meets their investment objectives.
- The investor directs the SDIRA custodian to purchase the property.
- The IRA funds are used to complete the transaction.
- The farmland is held as an asset of the IRA.
- The property may be leased to an unrelated farmer or rancher.
- Rental income is paid to the IRA.
- Eligible property expenses are paid from IRA funds.
- If the property appreciates, that appreciation remains within the retirement account.
- The property can eventually be sold, with the proceeds returning to the IRA.
The investor does not personally receive the farm income during the investment period. Instead, the income remains within the retirement account and is subject to the tax treatment applicable to that particular type of IRA.
Why Invest in Farmland Through an SDIRA?
One reason investors consider farmland for an SDIRA is diversification.
Traditional retirement portfolios are often heavily concentrated in financial markets. Agricultural real estate provides exposure to a different type of asset: land.
Farmland may also provide two potential sources of return:
1. Income:
Agricultural land can generate income when leased to a farmer or rancher. Cash rent is one common arrangement, although other lease structures may also be available.
2. Appreciation:
If the market value of the property increases over time, the IRA may benefit when the property is eventually sold.
Of course, neither rental income nor appreciation is guaranteed. Farmland values can vary significantly depending on location, soil productivity, water availability, commodity markets, interest rates, local demand, agricultural conditions, and other factors.
Investors should evaluate farmland based on the same fundamentals they would consider when making any other real estate investment.
How Is Farmland Income Taxed Inside an SDIRA?
One of the primary attractions of using an IRA to hold an investment is the potential tax advantages.
With a Traditional SDIRA, investment gains and qualifying income generally remain tax-deferred while they stay within the account. Taxes are generally paid when distributions are taken from the account, subject to the rules applicable to Traditional IRAs.
With a Roth SDIRA, qualified distributions can generally be tax-free because contributions are made with after-tax dollars and the account follows Roth IRA rules.
For example, suppose an SDIRA purchases farmland and leases it to an unrelated farmer. The rent is paid to the IRA rather than directly to the account owner. If the land later increases in value and is sold, the sale proceeds go back into the IRA.
The exact tax treatment can depend on the structure of the investment and the type of IRA involved, so investors should consult a qualified tax professional before proceeding.
What Happens to Farm Rent in an SDIRA?
If farmland is owned by a Self-Directed IRA, income generated by the property generally belongs to the IRA—not the individual account owner.
For example, imagine an SDIRA owns 160 acres of farmland that is leased to a local farmer. If the property produces annual cash rent, that rent should generally be directed to the IRA according to the custodian’s procedures.
The account owner should not simply receive the rent personally and deposit it into a personal bank account.
The same principle applies to expenses. If the IRA owns the property, expenses associated with the property generally need to be paid from IRA assets rather than from the account owner’s personal funds.
This creates an important practical consideration: the IRA needs sufficient cash or liquidity to cover applicable property expenses.
Who Pays Property Taxes, Repairs and Other Expenses?
When farmland is owned by an SDIRA, expenses associated with the property generally need to be paid by the IRA.
Depending on the property and lease arrangement, expenses could include:
- Property taxes
- Insurance
- Legal or professional fees
- Repairs
- Maintenance
- Certain management expenses
- Other legitimate costs associated with owning the property
The exact responsibilities can also depend on the agricultural lease.
For example, a cash-rent lease may place certain responsibilities on the landowner, while other lease structures may allocate expenses differently.
One important point is that the IRA owner generally should not personally pay expenses for an IRA-owned property. Doing so can create prohibited-transaction concerns.
Before purchasing farmland, investors should understand both the lease terms and the financial requirements of owning the property through an IRA.
Can You Personally Use Farmland Owned by Your SDIRA?
Generally, no.
The property must be held as an investment for the benefit of the retirement account. The account owner cannot use IRA-owned property for personal purposes.
For example, an investor generally could not purchase a farm through an SDIRA and then use the property as their personal residence, recreational property, or personal farming operation.
The same restrictions can apply to certain family members and other disqualified persons.
This is one of the most important differences between personally owning farmland and owning farmland through a retirement account.
Can You Farm the Land Yourself?
Using your SDIRA to purchase farmland does not generally mean you can personally farm the property for your own benefit.
For example, an investor should not assume they can have their SDIRA purchase farmland and then operate their own farming business on the property.
Likewise, investors need to be careful about providing personal labor or services to an IRA-owned property.
Instead, the property is generally treated as an investment asset. It can potentially be leased to an unrelated farmer or otherwise managed according to a structure that complies with IRS rules.
Because agricultural operations can involve complicated relationships between landowners, tenants, operators, and related parties, professional guidance is particularly important for SDIRA farmland investments.
Can You Buy Your Existing Farm With Your SDIRA?
Generally, you cannot simply transfer farmland you already personally own into your Self-Directed IRA.
This is an important prohibited-transaction issue.
For example, an individual generally cannot purchase a farm personally and then sell that same property to their SDIRA in order to move the asset into their retirement account.
Similarly, investors need to be cautious about transactions involving certain family members or other disqualified persons.
The IRS prohibited-transaction rules are designed to prevent retirement accounts from being used for personal financial dealings rather than legitimate retirement investments.
What Are Prohibited Transactions?
A prohibited transaction occurs when an IRA engages in certain transactions that are not permitted under the applicable tax rules.
For real estate investors, examples can include transactions that improperly benefit the IRA owner or other disqualified persons.
Potential problems can include:
- Personally using IRA-owned property
- Selling personally owned property to your IRA
- Buying property from the IRA for personal use
- Using IRA assets for personal expenses
- Providing prohibited services to the property
- Conducting transactions with certain disqualified persons
The consequences of a prohibited transaction can be significant. Depending on the circumstances, the IRA could lose its tax-advantaged status and the account owner could face taxes and potential penalties.
Because the consequences can be substantial, SDIRA investors should not rely on assumptions about what is permitted.
Can an SDIRA Buy Farmland With Financing?
An SDIRA may be able to purchase certain real estate using financing, but financing an IRA-owned property introduces additional tax and administrative considerations.
For example, an SDIRA may potentially use a type of financing known as non-recourse financing, where the lender’s recourse is limited to the investment property.
However, financed IRA real estate can involve additional rules, costs, and potential tax considerations, including issues related to unrelated business taxable income (UBTI) and unrelated debt-financed income (UDFI).
These rules can become complicated quickly.
Investors considering financing for an SDIRA farmland purchase should consult both their SDIRA custodian and a tax professional who understands self-directed retirement accounts and real estate.
What Happens When SDIRA-Owned Farmland Is Sold?
An SDIRA can generally sell an investment property, assuming the transaction complies with applicable rules.
When farmland owned by the IRA is sold, the proceeds generally go back into the retirement account.
For example, if an SDIRA purchases farmland for $500,000 and later sells it for $700,000, the proceeds from the sale would generally remain within the IRA rather than being paid directly to the account owner.
The investor could then potentially use those retirement funds for another eligible investment or continue holding the proceeds within the account, subject to the rules of the IRA.
This can allow investors to maintain a long-term real estate strategy within their retirement portfolio.
What Are the Risks of Investing in Farmland Through an SDIRA?
Although farmland can provide diversification and potential income, an SDIRA farmland investment is not without risk.
Agricultural real estate values can fluctuate. Factors that can influence farmland values include:
- Interest rates
- Commodity prices
- Farm profitability
- Local land supply and demand
- Soil productivity
- Water availability
- Irrigation infrastructure
- Crop yields
- Cash-rent levels
- Local economic conditions
- Government agricultural programs
- Environmental and conservation considerations
There are also risks specific to owning real estate inside a retirement account.
Farmland is not a highly liquid investment. Selling a farm can take time, and the property may require ongoing expenses even when it is not producing rental income.
The administrative requirements of an SDIRA can also be more involved than those of a traditional brokerage IRA.
What Should You Look for When Buying Farmland With an SDIRA?
An investor evaluating farmland should consider both the investment quality of the land and the rules governing the retirement account.
Important factors may include:
Soil Productivity
Soil type and productivity can have a major impact on agricultural value. Investors may want to review soil maps, productivity ratings, historical yields, and the property’s farming history.
Water Availability
For irrigated farmland, water can be one of the most important factors affecting value. Buyers may want to investigate irrigation wells, water rights, pumping restrictions, irrigation equipment, and the condition of the system.
Lease Income
If the property is already leased, review the existing lease carefully. Understand the rent, lease term, responsibilities of the landowner and tenant, and what happens if the property is sold.
Location
Location can influence both agricultural demand and long-term land values. Access, nearby farms, local infrastructure, and the surrounding agricultural market can all matter.
Property Improvements
Improvements such as irrigation systems, grain storage, buildings, fencing, or other agricultural infrastructure may contribute to the property’s value and income potential.
Long-Term Marketability
Consider who the likely buyers would be if the property is eventually sold. Productive, well-located farmland may have a different market profile than marginal agricultural acreage.
What Professionals Should Be Involved?
Because SDIRA farmland transactions combine retirement-account rules with agricultural real estate, investors may benefit from assembling a team of professionals before purchasing.
This could include:
- A qualified SDIRA custodian
- A tax professional or CPA
- An attorney familiar with retirement accounts and real estate
- A knowledgeable agricultural real estate broker
- Other professionals as needed for title, appraisal, surveying, water rights, or environmental questions
Each professional has a different role.
The SDIRA custodian can help administer the retirement account and facilitate transactions. A tax professional can explain potential tax consequences. An attorney can address legal and transaction-specific questions. An agricultural real estate professional can help evaluate the farmland, market conditions, lease terms, and comparable sales.
Is an SDIRA a Good Way to Invest in Farmland?
Whether a Self-Directed IRA is appropriate for farmland depends on an investor’s individual retirement goals, financial situation, risk tolerance, investment timeline, and understanding of the responsibilities involved.
For some investors, the ability to hold tangible agricultural real estate within a retirement account may be an important diversification strategy. For others, the administrative requirements, lack of liquidity, and IRS restrictions may make farmland less suitable for their retirement portfolio.
The important thing is to understand how the investment works before making a purchase.
Final Thoughts: Investing in Farmland Through an SDIRA
A Self-Directed IRA can provide a way for eligible investors to hold farmland and other real estate as part of a retirement strategy. Agricultural land may offer potential rental income and long-term appreciation while remaining inside a tax-advantaged retirement account.
However, SDIRA farmland ownership comes with strict rules.
The property must be held for the benefit of the retirement account, income generally needs to flow back into the IRA, and eligible expenses generally need to be paid from IRA assets. Personal use, self-dealing, and prohibited transactions can create serious tax consequences.
For anyone considering purchasing farmland with a Self-Directed IRA, the best first step is to understand the rules and build the right professional team before making an offer.
If you are considering farmland as an investment, AgWest Land Brokers can help you understand the agricultural real estate side of the transaction—from evaluating farmland and reviewing property characteristics to identifying agricultural investment opportunities. Contact AgWest Land Brokers to discuss your farmland investment goals and learn more about available agricultural properties.
This article is intended for general informational purposes and should not be considered tax, legal, financial, or investment advice. IRS rules regarding Self-Directed IRAs and prohibited transactions can be complex and may change. Consult a qualified tax professional, financial professional, attorney, and SDIRA custodian regarding your specific situation.
Ready to take the next step?
AgWest Land Brokers can help you understand the results of a farmland assessment before you make a decision to purchase. or sell To see how we can help call 866-995-8067, send an email, or fill out our convenient web form.