O/T Selling on contract...........

My sister and I each own an undivided half of the family farm. My house is entirely separate from the farm, though it abuts one end.

For estate purposes, our attorney (my wife's and mine, not my sister's) has been bugging me to divide the farm. Only how can you fairly divide a farm with a farmstead, with the house rented, on one end, 40 acres of timber on the other end, and odd shaped fields in between? The logical answer is to sell it and split the money. Our attorney responded that from a capital gains standpoint, that might not be the best answer, although that comment was made in a social setting where we didn't have the opportunity to go into detail.

When my sister had her taxes done this spring, her CPA asked her if we'd considered selling the farm, and suggested we would come out better on the point of capital gains if we sold the farm on contract, rather than an outright sale.

I'm aware that you can ease the capital gains on an outright sale by immediately re-investing in like property, but I'm not sure what all qualifies as "like property".

Just wondered if any of ya'll had any input, pro or con, to a contract sale. I'm thinking in terms of a 10 year contract. Kinda hate to sell the place as it's been in the family for 109 years, but--time marches on, and selling it would open up a new set of options for investments, etc.

Why not just buy her half of the property and keep the farm together? Sounds like the lawyer is just trying to 'drum up' some business..

Do like I did in the same situation. I just signed over my half to my sister and just walked away. No taxes and no fooling with paperwork. Wasn't about to pay taxes to the governments on something I would never use again. Yes, maybe I lost money doing that but I don't have to worry about it.

Farmland is one of the few paying investments right now, not sure where you would go with your money?

If at all on good terms, can you buy out your sister and have it whole? I'd sure work hard for this outcome.

Otherwise, an appraiser both of you like, to value the different componants of the farm and apply a value to each; then try to divid equally. But, in 10 years the land might drop, the building site might raise in value, and leave hard feelings at that time - it's a tough one.

Agree with your guy, those undivided 1/2 intrests blow up on people more often than not, best to clear them up if you can, they get ugly so very often.... Get out of that. Inlaws, health care costs, children and neices/nephews and their spouses all make an undivided intrest a real nightmare for long-term, you do want out of that.

The 1033 exchanges are _very_ difficult to do with extreme red tape - you need an experienced peron handling that for you, not just anyone. You can't pre-arrange things, but you only have a short time to do the exchange, and it's just a paperwork nightmare. Don't do or sign anything until you have a plan in place with a legal firm that has done many of thos things. Seriously.

Contract sales get you the interest income too; but if they default you get a lot of loose ends to clear up to get the property back. If they trash the buildings or mine the farmland alnog the way, you get to keep both their payments and the land, but could be poorer at that time so it's not all gravy.

--->Paul

My wifes Mothers family had a farm near Butterfield Minnesota. There Dad had sold it on land contract, moved to town, then, not long after, died. Then their Mom died, so it was all owned by the siblings. I had nothing to do with conversations about this, but heard my MIL always complaining about that sale. Payments were late, and they had to take it back twice, because the farmer could not make payments. My impression is DO NOT sell on land contract, unless you can afford to take it back several times over, all while saying positive things about it!

Goose long term capital gains through the end of 2012 are taxed at 15%. Unless Congress lengthens that legislation, long term capital gains will be taxed as ordinary income depending on what rate you pay starting in 2013. I am trying to sell 9 acres before this year is out. I can make more investing it in tax free municipal bonds then the land rental I receive which is always late.

Dad taught me that a person should never get so attached to anything material that I couldn't part with it. That applied to our family farm just the same as anything else.

When splitting estate holdings, the longer you draw out the process, the more opportunities there'll be for problems. Take it from someone who's BTDT, sell outright. Find a buyer who'll handle their own financing. This is a tough time to be in the banking business.

There are ways to make selling on contract work, but there are far more ways to make it blow up in your face. Take the money and run. Wish we would have.

Doing a 1031 Exchange isn't something you can do as an afterthought! You can never take posession of the money yourself. Somebody else has to handle the sale of the property and the purchase of simplar property for you.
I called these people several years ago and talked to them about it. I learned a lot. They didn't charge me a dime to talk. I'd NEVER sell farm land without talking to them now that I know what I know about it.
Starker and Associates

If your Sister and yourself inherited the farm then regardless of when you sell it you should only be liable for capital gains tax on the amount that the farm has increased in value since you inherited. If the original value was above the threshold in place at the time of inheritance then the estate (or someone) would have had to pay any federal iheritance tax due that same year. Any income from renting fields, sale of timber etc. during the time you have owned it should have been reported as income by all parties receiving any payments.

Buy your sisters half if she will sell.You could probably by it cheaper than anyone else.I had the same deal with my sister.When she died some step kids she never saw ended up with her share of the farm.

Goose,
30 years ago I purchased property on contract. NEVER AGAIN! Seller's wife dies, seller dies, estate goes to their 2 sons. One son wanted to be paid off, because he wanted to file bankruptcy. What a mess, NEVER AGAIN. Give me the cash. If buyer doesn't have insurance, it becomes your problem when someone gets hurt and you get sued.

Sell before the 3.5% federal sales tax kicks in 2013.

George

The value of farm land is high right now so it makes selling attractive but land is inflation protected much better than just money saved. The federal government has record high debt. One of the only ways they can cover it is by printing money and having inflation. So before I would sell I would think long and hard about it.

I have seen families keep a piece of land together for years and have a income from it. Then they sell it and the money is gone in just a few years. Money walks a lot easier than a piece of land.

As for 1031 land exchanges. The rules are complex and if you mess up one little detail and you will lose the tax savings.

I feel that my land is the best investment I have. The stock market is too fickle. I would run from any bond right now too. Public or private. I owned GM bonds and the government cheated us out of our money. First time in history that unsecured creditors got paid before secured ones. Do you think that the retirement time bomb is going to just go away on the public employees??? There are cities in CA filing bankruptcy this last week. Illinois is close to it state wide. There is 100 trillion in unfunded retirement packages nation wide. It will blow up!!!

IF it was just me and one sister I would just set down with her and see what she wants. I would split the farm up. Equal in value and interests. Maybe she does not want the hassle of owning buildings/house or she does and wants the rental income from them. Set down and work out want is important to you both. I bet that you could work it out. The cost would just be the survey and new deeds. Then you can control it how ever you want. Neighbors just did this one wanted the house and barns he got them an forty acres of ground and the other brother got sixty acres of ground. They both are happy and get along much better now.

Do your due diligence on carrying a contract.

When you do that your are required to comply with all the federal regulations whether you've funded 1 loan or a million. You become a mortgage lender.

If you decide to do that check the buyer out. Full credit and back round checks. Huge down payment so the buyer has some incentive to keep his end of the deal.

Search the archives for horror stories and get a contract that protects you. Stories like: buyer buys property on contract, logs it, strip mines it, creates a garbage dump, dumps radioactive waste, etc,etc, etc, and then disappears leaving you with worthless property at best and responsible for cleanup and lawsuits at worst.

Local true story involves guy buying a property and hauls in over 1000 yards of dirt and fills in a low lying area on his property. This created a huge drainage problem for the subdivision upstream. Flooding and lawsuits followed. Buyer quit making payments, bank foreclosed, subdivision ended up paying 40K to have drainage repaired and are now suing to get money back. County got involved, after that fact. No one complained, per the county, over the months it took him to haul and spread the dirt.

Just all around a nightmare.

The CPA is a moron.

In 2008–2012, the tax rate on qualified dividends and long term capital gains is 0% for those in the 10% and 15% income tax brackets. For those in higher brackets capital gains are taxed at 15%.

If you sell - sell now - don't drag it out.

In 2013 the capital gains tax rate is scheduled to increase to what ever your personal tax rate is. Couple that with the increased individual tax rates scheduled to kick in on 1-1-2013 and her CPA is about to cost both of you a lot a money.

Don't think I'd sell- I think farm land is a better investment than whatever else you could do with the money. And as JDSeller said, the monetary system is going to blow up one fine day, and I think you'd be better off with tangible assets rather than $$$ invested when that happens.

But if you are going to sell, do it in 2012, because capital gains tax advantage will probably go away after the election.

It would be a good idea to split it now, though, especially if you're on better terms with your sister than you will be with her heirs after she passes (or vice versa). The problem with carrying the place on through the generations is two-fold- the longer it goes, the more owners there are, and the harder it will be to ever get a consensus on anything. When the house needs a new roof, you can bet somebody will object.

Get a trusted real estate person to give you a market analysis on the farmstead, and per-acre value on farmland and timberland. Then figure out a way to split it that will be equitable, maybe with some "boot" one way or the other, if that's necessary to equalize the values.

You could also sell just the timberland, if neither of you is interested in it and want to raise some cash.

I'm kind of a fan of selling on contract- but then, I'm a lawyer and the idea of forfeiting the contract doesn't scare me. You get better interest than you can any other way, and sure, bad things may happen, but more often, things go fine. Be sure a deed is escrowed somewhere, build sufficient safeguards into the contract, insist on insurance (including liability), and get enough down payment that buyer has skin in the game. Check on the property regularly to make sure he's not turning it into a meth lab.

Nobody ever went broke getting 20% down, and either collecting 5 or 6% interest, or getting the property back and reselling it.

One question nobody asked is "what's your cost basis"? That's a fairly important question when you're talking about capital gains.

If you and your sister inherited the family farm, it got a new cost basis when you inherited it, which would be its appraised value at time of inheritance. Which could mean there's not enough capital gains to worry about. But farms are frequently gifted from generation to generation for various reasons (typically so owners qualify for Medicaid) which means the cost basis could go back several generations, resulting in significant capital gains.

It is unknown what the future capital gains tax rate will be. But we do know what it is today, and it is historically quite low. If you're going to sell, there's never been a better time. Farmland prices are high and the capital gains tax rate is low.

I am cautious about selling on contract because I have been burned in a land contract sale. In a land contract the seller carries a significant amount of risk if land prices fall before the land contract is completed. The seller is OK as long as land prices continue to rise, (the seller gets the land back in a default) but the seller can take a lose when land prices fall before the contact is completed.

In the 1980's my family sold off a small plot of land, for a very good price, to a neighbor who had just purchased the adjoining farm. The buyer wanted to buy it on a ten year land contract because he no longer qualified for another mortgage. Our accountant assured us it was a very good deal.

A long story short, commodity prices fell, land prices fell by 50%, the neighbor lost the farm he had just bought and he re-negotiated our land contract to the then current lower price per acre. We wound up settling for 60% of the original sale price.

Right now federal capital gains taxes are only 15% on your actual capital gain since you inherited the land. You don't pay tax on the bias value at which you inherited it, only the gain since you've owned it. Check what your state capital gains tax rates are.

Have your accountant put down on paper your taxes and net procedes from an outright sale and and from a land contract. Also do your homework or consult a lawyer about the additional risks in a land contract. You may find the tax savings are low compared to your extra risks in a land contract sale. At minimum, make sure you are fully protected in the contract.

Do what is best for you and your sister, your attorney may just be trying to drum up some work for himself when his business is slow.

Good luck.

Doesn't answer your question, but one thing I've seen done to divide property or anything else; one person puts a value on the whole thing; other person has the choice to either buy the other half or sell theirs.

The disgruntled son cannot force a payout on a C4D.

I think Id just as soon own land in todays climate versus other investments.

As an attorney I draft totally different contracts if Im repping the seller versus if the buyer although both are perfectly valid and legal.

If you go the contract route hire a competent professional real estate attorney and seek his advice and beware of non professional opinions

John T Country Lawyer (On the road currently)

Thanks for all the input.

I intend to talk with my sister's CPA and our attorney this week. Our attorney is a brother to one of my best friends and he's always done well for us in the past. He specializes in estate planning and wills, so he should be up to date on this.

My wife sides with my sister on selling the farm, but I'm not going to let two females stampede me into doing something I'll regret later. However, my sister lives 75 miles away and I get stuck with all the management and maintenance headaches, and I wouldn't mind being out from under that responsibility. I charge the farm an annual management fee, but it's still not enough to cover the time I actually spend.

Thanks again for the input.

I'm no legal expert but I have bought and sold on contract several times before.
I see it as a win win situation. Seller has to do more legwork such as credit and background checks, and you would normally pay to have someone draft the forms. In turn You get a down payment now and a steady source of income for a period of time - like 5 years - without beating down the principal very much and you pay different taxes (less) on interest income.
The buyer gets a chance to get his foot in the door without jumping through as many hoops as the bank (read bureaucrats) require. Make the contract for 5 or 7 years after which he has to pay the full amount but should have been able to make or break it by then and get money from the bank.
If he fails he loses it all and least in MN a CD holder can forclose much quicker than a bank can (read bureaucrats).
I'm not John T or others here who bear the burden of a legal education but have sat in the kitchen and spelled out the terms of a contract and then went and had them notorized and recorded at the registrar of deeds. It will only work with two honest parties and is good if you know the person interested or are from the same town, etc.
By the same token, you can darned sure market your own property too. Pay for an appraisal then put an ad on craigslist or in the newspaper.
You would be surprised at how effective it can be if you mention you would carry a contract.
You can do a lot of legwork and maybe even buy a couple of for sale by owner signs at the hardware store for the price of a realtor.
Yours is a bit more complicated because of the sibling so John T is right about hiring help but a contract for deed is a good and effective way to buy and sell property. I think for the seller, in this market, it is especially good.

When I sold my 80 acres in Southern Oregon I had a company that deals in taking over your contract, they did everything for me. I got a deposit every month in my account and no problems once a year they sent me the amount of interest that I owed on. Wouldn't do it any other way.
Walt
PS stay away from Lawyers you get screwed nine of of ten times from incompetents. Used to listen a guy on the radio from Florida he got all kinds of calls from people who had bad advice from lawyers. My SIL got screwed by one in Mn.
Sorry John T but facts are facts.

I used to love land contracts. I called it "Be the Bank". Properly written and you can usually write it anyway you desire as long as it is legal. Things may have changed. Check it out. Dave

Accurate and tactful reply.

you can have it appraised and divide by valve...

Thanks, Im usually much more wordy but Im on an extended RV trip and not much net time lol

John T

I shoulda mentioned, our farm is between two BTO's, both of whom I've known, and have gotten along well with, for years, and both have sons involved to eventually take over.

If I decide to go ahead, I'll approach those two individually first.

Could get the place appraised then buy her out from the half value. Both should be happy then. Or could then sell it as a whole without her being involved.