DS-Lancastor Farming Saturday, May 24,1986
Brockett’s Ag Advice
Hb|r _ IjM By John E. Brockett
Farm Management Agent
J 7 Lewistown Extension Office
Farm Business Transfers
How can a farm business be
transferred from one person to
another? The question is not as
simple as it would appear. There
are a number of things that
everyone concerned must consider
before action takes place. First let
us explore some of the items that a
person must think about before
embarking on the not so easy road
of an actual transfer. After reading
these over, perhaps you will begin
to see the potential complexity of a
farm business transfer.
Some Major Considerations
Tax implications are often a
major concern, as they well should
be, but some people only consider
one or two taxes instead of the
entire group. A farm business
transfer may involve local, state,
and federal income taxes. It also
may involve gift, inheritance, and
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federal estate taxes. In some cases
there could also be transfer and
real estate taxes. Finally, a
business transfer may directly
affect social security taxes and
social security benefits. All of
these taxes should be considered
before deciding on the best way to
transfer the business.
Affordability is often overlooked
in the desire to keep the business
perking along under new
management. It is important to
consider the big question, “Can
this business generate enough
income for the buyer or acquirer to
make the payments?”
Economics for the Transferor
may be neglected if those wishing
to transfer a farm to a family
member in the least painful way
for that member do not do some
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transfer provide the transferor
enough income to maintain a
reasonable standard of living?
Subsequent transfers may be a
forgotten issue until it is too late.
Farm property may be lost to a
family through divorce, death, a
forced sale, or just plain “tired of
farming”.
Security is somewhat connected
to the economics issue. However, it
may actually be more than an
economic problem. Those of us
who have passed through a large
part of life realize that if we do not
take care of ourselves, we may be
out in the cold. Owning property or
a guaranteed home or something
tangible may mean peace of mind
that can actually enhance physical
and mental health.
Transfer Methods
Outright Sale is possibly the
most common method of transfer.
In this case the seller determines
the price and terms and the buyer
borrows the money from
somewhere including the seller.
The deed changes hands and each
party is left to pay his or her own
taxes, invest his or her own money,
and make his or her own decisions
independent of the other party.
Installment sale is another way
to sell or transfer a farm business.
An installment sale simply means
receiving payments over a period
of time, usually in excess of a year.
It can be secured by a mortgage
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(real estate), a note (usually other
than real estate), or a sales con
tract (a type of promissory note).
Present tax laws make some in
stallment sales a poor choice.
Sales of equipment are no longer
feasible candidates for installment
sales because federal income taxes
will be charged on the entire profit
of the sale in the year of the sale.
Thus a seller could actually pay
more in taxes than he or she
received for the property in the
year of the sale.
An annuity is a special type of
installment sale whereby the sale
usually is completed with the death
of the seller. The seller actually
has little or no security. Changes in
the federal estate tax laws have
probably helped to cause this
method to be a less viable alter
native.
Gifts can often be used to ad
vantage if they are well thought
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out. There are a lot of con
siderations that should be made
before a gift is used in any major
transfer situation. Gifts are
usually most useful as a way to
partially transfer the farm
business. Gifts under $lO,OOO are
often called “tax free”. This may
lead a person into a trap. They are
free from “gift taxes” but may
cause income taxes, since the cost
basis of the gift for the person
receiving the gift is the same as the
cost basis of the gift when the
person giving the gift owned it.
Thus income generated by the gift
or income from the sale of the gift
may be taxable.
Inheritance is another way to
transfer business assets, in
Central Pennsylvania most farm
businesses are no longer subject to
federal estate taxes because of a
combination of tax credits and
valuation options.
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