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Farm Like A Billionaire--Harvest Tax Breaks

This article is more than 10 years old.

The following story appears in the June 25, 2012 Investment Guide issue of Forbes magazine.

Billionaires Michael Dell, Donald Newhouse and Michael Price have done it. So, too, has former President George W. Bush. If you’ve got extra acres surrounding your primary or vacation home, you might be able to do it, too: Declare your backyard a farm or a wildlife preserve and harvest real estate tax breaks and maybe income tax savings, too.

Who knows? You might discover a passion for farming and/or make a profit.

David Braff, a top litigator at Sullivan & Cromwell in New York City, and his partner, Niko Christou, a photographer, were weekending in Bucks County, Pa. when they fell in love with a stone farmhouse, built circa 1780, on 30 acres of land. The owner ran an antique shop, while a tenant farmer grew corn.

After Braff bought the property for $1.5 million in 2000, the men were inspired by the lavender fields of Provence to plant four varieties of the plant over 8 acres, creating a setting so spectacular that Lands’ End rented the farm for a month for a catalog shoot. On weekdays Carousel Farm Lavender, LLC runs tours at $10 a head. On farm-stand Saturdays it sells lavender oil, distilled in an original corn crib, plus sachets, soaps, candles and skin care products.

Braff and Christou say the farm business is now profitable. An agricultural exemption knocks $9,000 a year off what would otherwise be a $27,000 annual real estate tax bill, according to the county assessor. On weekends Braff rides his American Morgan horse, Theo, while Christou, who lives on the farm full-time, builds the business. “It’s a way of connecting to a more rural way of life,” Braff says contentedly.

If farm living, or tax saving, appeals to you, here’s help.

Zoning rules. First, check with your local zoning department to make sure farming is allowed, especially if you’re in a residential zone. If you’re growing vegetables for your own (and friends’) consumption, you’re probably okay. But once your venture becomes commercial—you’re selling at a farmer’s market or to local restaurants—you usually need a special business permit.

Raising animals (or bees) is trickier and may require you to check in with your local health department. Here the laws are constantly changing as more people get the itch to farm and, also, as more neighbors object. In 2010 New York City’s board of health lifted its ban against beekeeping, legalizing the hives of hundreds of residents. If chickens are your thing, watch for new and updated restrictions, at Backyardchickens.com.

Property tax breaks. All 50 states give preferential property tax rates to agricultural land in an effort to help farmers and/or fight urban sprawl. But how easy it is to claim this break varies greatly, and some states recoup back taxes if the land is taken out of farm use. The Lincoln Institute of Land Policy has details on all states at its website. (Search “tax treatment of agricultural property.”)

In Ohio a “farm” must be either at least 10 acres or have produced an average of $2,500 in sales over the prior three years. New York requires $10,000 in annual agricultural sales, or $50,000 if the farm is less than 7 acres. California is tough; farmers can get 20% to 75% off their property tax bill, but only if they agree in writing not to develop their land for at least ten years, and in most cases they must have at least 100 acres.

New Jersey allows you to snag a farm break with just 5 acres of land “devoted to agricultural and/or horticultural use” (not including the immediate area around your residence) and $500 in annual farm sales—a threshold neighbors can meet by buying each other’s products. “Everybody talks about what their products are at cocktail parties,” reports John McManus, an estate lawyer in New Providence, N.J. Pumpkins, Christmas trees and alpaca wool are popular.

Media mogul Don Newhouse paid $48,547 in real estate taxes last year on a 3-acre plot in Hopewell Township, N.J. that includes his 7,900-square-foot Michael Graves-designed contemporary home. But he paid only $1,827 in tax on three “farm qualified” plots, totaling 274 acres, that surround those 3 acres. (He sold $63,000 in wheat, hay and corn from the farm-assessed parcels.) In Bedminster, N.J. value investor Michael Price has 92 farm-qualified acres assessed at only $30,400 adjacent to a 4-acre spread that includes his house and is assessed for $3.1 million. Forbes Editor-in-Chief Steve Forbes also has farm-assessed property in Bedminster.

In Texas, ranches owned by Dell Computer founder Michael Dell and former President Bush get a special break that can go to land managed for wildlife and hunting. (Full-time farmers get a different break.) The property taxes on Bush’s 1,580-acre ranch were $32,870 last year but would have been $70,000 without the special assessment.

From time to time agricultural breaks cause a political ruckus. In March Maine Treasurer Bruce Poliquin, a candidate for the U.S. Senate, gave up a state tax break for commercial tree growers that had reduced the assessment on his oceanfront property (including a 6,400-square-foot home) by $1 million. He acted after a local activist group discovered that a separate conservation easement on his property ­prevents tree cutting, except to maintain views.

But if you’re playing by the rules there’s no reason to pass up an ag tax break. Check with your local tax assessor or your state departments of agriculture or revenue for details. Just buying? In some states a special farm assessment can carry over from prior owners; in others you have to submit a new application, sometimes each year. This can be a simple form or one that requires backup information such as a surveyor’s report, a soil test or farm sales.

Income tax angles. To get the most income tax breaks for farming, you have to prove to the Internal Revenue Ser­vice your farm is a business—not a hobby. The IRS presumes a taxpayer is in business if he or she can show a profit in three years out of five (or two years out of seven for horse breeders). That essentially allows for two years of startup losses for most businesses (and five for horse farms) that can be claimed against other income from employment, business ventures or investments.

After that period, if a taxpayer (particularly a high-income one) claims a farming loss the IRS will often assert he was really just pursuing a hobby, in which case expenses are deductible only to the extent of farm income. (You can’t claim a tax loss from hobby farming—even if you can get a real estate tax break.) How do you prove your farm is a real business? Maintain impeccable records supporting the number of hours you work and all farm expenses and sales, says Michael Gillen, a CPA with law firm Duane Morris in Philadelphia. And try not to enjoy yourself too much—the IRS uses “personal plea­sure” as evidence you’re just a hobbyist, he warns. Even if you don’t make an operating profit on your farm, you might have a case for profitability based on appreciation of your land, says Thomas Ostrander, a tax lawyer at Duane Morris.

Green tax breaks.

If you’re willing to permanently give up development rights on your land, consider donating a conservation easement to a charitable land trust. To the extent the easement permanently reduces the market value of your property, you can claim a deduction on your federal (and sometimes state) income taxes. Under current federal law the deduction is limited to 30% of your adjusted gross income, and any amount you can’t use one year can be carried forward and used over the next five years.

Farmers can also tap tax breaks for alternative energy. Physicians Diana Sylvestre, an internist, and Charles Homcy, a cardiologist and venture capitalist, bought a 25-acre weekend place in Sonoma County six years ago. They planted olive trees, established honey hives, rebuilt the main house and built a guest house and a “honey hut,” where they extract honey, cure table olives and press olive oil. The roof of the hut is made up of photovoltaic solar panels. The couple got a federal income tax credit equal to 30% of the $120,000 cost of the solar panels and state solar tax incentives, too.

The panels generate enough electricity to cover the needs of all three buildings and the couple’s two new Chevy Volts. “This keeps me in shape and allows me to blow off steam,” Sylvestre says of her weekend work planting and pruning trees. The farm is not making a profit yet. “Don’t quit the day job,” she advises.

You can research federal and state green incentives at dsireusa.org. Check in with your local utility, too. In California, for example, PG&E offers 49 different rebates for agricultural users who conserve on energy or go green.

For the nitty-gritty on income tax angles get the 89-page IRS Publication 225, Farmer’s Tax Guide, at IRS.gov.

See also:

How To Farm For Love And Profit--And Save The Farm for more on conservation easements and farmland preservationists successes and struggles in Pennsylvania.

In Pictures: Portrait Of A Bucks County Farm for a sneek peak at Niko Christou's book, Images In Time.