Today we will be examining the top things you should consider before selling your farm or your farm land.
First things first, let’s take a look at the decision of whether or not you should be selling your farm in regard to your cashflow. Clearly, you’ve thought about the implications with respect to multi-generational legacies. Maybe your parents and your grandparents owned this farm and you have no one to sell it to in the family, or maybe you simply need the cashflow.
Let’s take a look at the cashflow aspect of selling farmland. A lot of times when people are selling farm land, they recognize that they can get significantly more cashflow from the proceeds of the farm sale than they can from the actual rental of the land. Land rental in Canada for farmland is at a very low cap rate. The important aspect is planning your cash flow, is the land rent sufficient for your lifestyle needs? Would you like to be able to access the capital from the land? If the next generation is not interested in farming, would they just sell the land when you pass away?
As a result of that, a lot of farm owners are moving towards getting out of the farm and selling it to a third party. We’re seeing a lot of these large third-party conglomerates that come in and pick up all this farm land. Assuming you’ve made that decision that you do want to sell the farmland either for cashflow reasons or simply because it’s been a bit of a headache for you and you just want to get rid of it.
Let’s take a look at the lifetime capital gains exemption. Every farmer has $1 million of lifetime capital gains exemption for “Qualified Family Farm Property”. Now the question of whether or not your land will qualify for that lifetime capital gains exemption is a very important one and can be a very difficult question.
It’s not a clear cut like the small business capital gains exemption. It’s a little more difficult, so to make sure you get to the bottom of it I would advise you to talk to your accountant, talk to your CFP, even your investor advisor in order to plan ahead.
You don’t want to be caught in a situation where you’ve sold the farm and then you get a huge tax bill because you didn’t know. Let’s take a look at some of the factors that may impact whether or not you’re getting a lifetime capital gains exemption.
- When was it purchased?
- What was the purchase price?
- Is it jointly owned? Corporately owned?
- How long have you actively farmed it?
- Is it a multi-generational farm?
- Have you been renting it out? If so, how long?
- Has someone else in the family been renting it from you?
- How many of these family owners were actively involved in farming operations?
All of these factors will be impactful, but basically the longer you’ve been farming it and the longer you’ve personally been doing it, the more likely you are to qualify for the lifetime capital gains exemption. Even if you weren’t farming it specifically, and whether or not your spouse qualifies again, will depend on some of the rules and how many years they farmed or if they were ever involved in the business as well.
Now that you’ve sold your farm land, you have an investable chunk of money which can generate you monthly cashflow and will likely be taxable. As such you will likely need to formulate a plan which encapsulates not only your tax requirements, but your general financial needs as well.
For most farming clients we meet with, this is a huge decision with a wide variety of variables. At the Tetrault Wealth Advisory Group, our clients find peace of mind in meeting with our team to review their unique situation and help determine the best course of action to ensure their goals are met.
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