If you are reading this guide, you are probably more interested in leasing your property in the short-term, but you might also be considering selling the property down the road. The decisions you make now, while leasing the land, can affect the consequences of selling your farmland at a later time.
Giving consideration to your long-term plans can increase tenure stability, or at least enable more accurate planning, for your tenant and improve the sustainability of the property during and after your ownership. Below are some ways you can increase tenure security for your tenant if you are planning to sell the farm. The effects of the manner in which you transfer your farm can be examined in the “Additional Resources” found below.
Option to Purchase
If you are sure you want to eventually sell the property, giving your tenant the option to purchase the land can improve their tenure security and the sustainability of the property. Consider an option to purchase in the lease agreement. Consider whether rent, in whole or in part, is applied to the purchase price.
Right of First Refusal
If you’re not ready to make a commitment regarding the sale of your property, you can still give your tenant the ability to own the property if you do decide to sell. Placing a right of first refusal in the terms of the lease means that if you are going to sell, your tenant has the option to match the offer of another buyer.
You may wish to enter an installment contract with your tenant instead of a lease. Land contracts, also referred to as installment land contracts, contracts for deed, and land sale contracts, are sales transactions in which the vendee (the buyer) makes a down payment followed by periodic payments, with interest, and the vendor (the seller) retains title to the property until all payments have been made.
During the contract, the buyer is considered to have equitable title to the land. This means they have the right to possess, use, and dispose of the property and the right to exclude others from the land, except as provisions in the contract may dictate. Buyers, however, also accept the landowner responsibilities, including paying taxes, maintaining insurance, and making repairs. The seller retains legal title to the property until the final payment, or an agreed upon amount, is paid.
The popularity of land contracts as a method of land transition has waned in popularity over the last few decades, but it does continue to hold appeal for certain operator demographics, particularly those lacking large amounts of capital and access to financing from lending institutions. The use of land contracts to enable land access for beginning farmers are also promoted through incentive programs at the state and federal level. If considering such an arrangement, both landowner and farmer should understand the advantages, risks, and potential legal consequences of entering a land contract.
Learn more about the benefits and risks of installment land sale contracts and how entering such a contract with a beginning farmer can help the landowner and the next generation of farmers.
- Hosted by Utah State University this site provides information on agriculturally related income and self-employment tax issues.
- Part of Iowa State University, the Center provides additional information on tax issues and estate planning regarding the transfer of farmland.