Dave Cain: Welcome to unsuitable on Rea Radio, the award-winning financial services and business advisory podcast that challenges your old school business practices and their traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie while offering you meaningful modern solutions to help enhance your company’s growth. I’ve your host Dave Cain. Owning real estate has always been considered to be a valuable asset particularly when the land becomes a source of revenue. With the reward of revenue cash comes the cost associated with taxes, estate planning, and other red tape.
Today’s guest is going to identify tactics and strategies that can help you maximize the value of your land while minimizing your tax liability. Brian Kempf, a principal in Rea’s Millersburg, Ohio office is famous for developing tax strategies and opportunities for land owners especially if you’re using your land as a source of income or you’ve inherited some land that is leaving you looking for ways to minimize your tax liability. Let’s get started to find out a little bit more about these tax strategies. Welcome to Unsuitable, Brian.
Brian Kempf: Thanks, Dave. It’s good to be here.
Dave: Good. I wanted to start out as I looked at your bio and I know you quite well, I wanted to compliment you on your leadership positions in your communities. I look at your resume, the leadership positions are as long as your arms. Well done.
Brian: Well thank you.
Dave: You’re known as a leader in your community and within the firm. You’ve definitely have invested in your community.
Brian: I enjoy helping out our community.
Dave: Fantastic. I also noticed that one of your hobbies that you’ve listed is cooking.
Brian: Yes.
Dave: This time of year, you do a lot of grilling?
Brian: I do a lot of grilling. We have a garden too, which I enjoy doing. We eat a lot out of our garden. I enjoy grilling. Stop and get meat at the local grocery store and pick vegetables out of the garden and make something whatever I feel like making that night.
Dave: Are you a gas grill or charcoal grill, open fire, a little of both?
Brian: I’m a gas grill for convenience for the most part, but I like smoking if I have time to do it. Pork, beef, chicken, you name it. It goes on the smoker.
Dave: What’s your favorite recipe?
Brian: Probably for the smoker, I enjoy doing pork.
Dave: Pork shoulder?
Brian: Memphis pork shoulder. Yeah. That’s probably one of the easiest things for smoking and one of my favorite as well.
Dave: Wonderful. Wonderful. I imagine your wife enjoys that having you take … Now, who does the cleanup after the cooking?
Brian: We share it. It depends on what else we have to do that evening and who wants to play with the children or which children … One has to be playing with them.
Dave: Who needs a bath and all that jazz, huh?
Brian: Exactly.
Dave: Great. As we mentioned in the intro, we’re going to talk about a rather complex set of strategies surrounding real estate. I think you have mentioned to me that what we’re going to talk about is the Current Agricultural Use Value, also known as CAUV. I think you see that in the real estate duplicates and invoices. Tell us a little bit about what the Current Ag Use Value means.
Brian: Yeah. Well this applies largely to farmers and landowners. I live up in Wayne County, so there’s still a substantial amount of farm and agriculture up there. The CAUV, Current Agriculture Use Value, applies to real estate taxes. If you own a commercial property, the county will come in, do an assessment of the value and you’ll pay real estate taxes based on that value. If you own land that you use for commercial farming, commercial agriculture, you are entitled to a reduced rate for your real estate taxes. Rather than being taxed on the greatest use of your land, you can be taxed at an agricultural use, which can be anywhere between 25 and I think the state average is 53% of the market value. You can save 75 to 50% on your real estate taxes.
Dave: Well let me give you an example, see if I understand that. You mentioned in the opening we were talking about cooking and gardening and you must have a really awesome garden. Let’s say that you had 10 acres, which I think you would have to have to have that. Let’s say you took those vegetables from that garden out to a roadside, which his commercial, and you sold that. Could you apply for the agriculture use value?
Brian: Yup. That’s a great example. Yeah. If you have 10 acres or more, you are eligible for the CAUV program. You can have 10 acres or less, but you do have to prove that you had at least $2,500 of revenue from those less than 10 acres. If I had 10 acres of vegetables, I could apply for the program as long as I can show that I’ve had at least three years of production from those 10 acres. It’s a program that’s administered by each county, so you have to fill out an application.
Dave: Different county by county?
Brian: The program is a statewide program, but it’s administered by each county. Each person would have to go to their respective county that they own the land in order to get the CAUV.
Dave: Is this difficult to do? Is it a lot of red tape or it just takes a little bit of time?
Brian: It’s not terribly difficult. It’s a two-page application to get into the program. You provide some data. If you have more than 10 acres, it’s even easier because you don’t have to have that income requirement. It’s not terribly difficult. The main thing is just that you can prove that it’s being used for agricultural use. Otherwise, it’s not difficult. You do have to renew on an annual basis and there’s a small fee when you apply in the first place. It’s not terribly difficult to get in.
Dave: You mentioned have to have $2,500 of income or I assume that’s revenue.
Brian: Revenue.
Dave: Not net income.
Brian: Not net income. That’s a good point.
Dave: You don’t have to prove whether you had a profit on that venture or not.
Brian: Exactly right. If you sold chickens or vegetables or hay or whatever you did with it or if you rent it out and you rent it for $2,500 or more, you can also qualify. You don’t have to be the one producing it. You can be renting it out and still qualify for the CAUV.
Dave: If I had a business out back that was repairing farm-related equipment, that would also apply?
Brian: That would not apply.
Dave: That would not apply.
Brian: Exactly. It has to be used in agriculture.
Dave: In agri. Even though I’m doing a service for an ag business, that would not apply. There is a little bit of definition there you have to work through.
Brian: Exactly. You can get into a lot of details, but there’s certain things that qualify for CAUV. Traditional agriculture is what they’re after.
Dave: Let’s talk about a few examples, so our listeners get a feel of what we’re talking about on the CAUV. Obviously, we use the example of a vegetable garden, which might be … We think of traditional farming as traditional farming, but there are some other things that may qualify like the gardening, the roadside stand. What about if I had a Christmas tree farm.
Brian: That could also apply.
Dave: Could also apply?
Brian: Exactly.
Dave: What if I had ambitions of timber? Harvesting timber?
Brian: That’s another good planning point. One thing that you can do is if you have … Let’s say you have a 20 acre parcel and 12 acres are used for tillable acreage and you’re farming them and you have eight acres that are also timber, the eight acres of timber even though they are not used for farming, if they’re adjacent to the land that is being used for farming, it can qualify under CAUV as well.
Dave: Again do you see as you talk to clients and prospects is this being overlooked?
Brian: Traditionally what I see is that the program is not being overlooked, but there are some planning points that you can sue. One is if you have multiple parcels that are adjacent to each other. Let’s say you own three four-acre parcels. One parcel is less than 10 acres, but if they’re all adjacent and they’re all the same ownership, you can lump all three parcels to make a 12-acre parcel that would qualify under CAUV. That’s one point that is sometimes overlooked. Another is if you have … Let’s say own some land personally and you also own some land through a real estate partnership group and maybe your wife owns some land. You have three different ownership groups and each has a four-acre parcel.
Because they are not the same ownership, you can’t lump them together and qualify. If you are able to have the same ownership on all three parcels, you could then qualify for CAUV. At 12 acres it may not a big deal, but if you add them up, it could start to save some real dollars and on an annual basis as well.
Dave: It just occurred to me thinking about current events within the State of Ohio and the influx or the medical marijuana about to hit, I would assume that would qualify.
Brian: That’s a great question. I would assume that it could qualify, but that will probably be one of the things that would have to be spelled out in the regulations …
Dave: I mean there’s a lot of gray areas, but that could be one and I’ve not seen or heard that, but that’s possibly one that would …
Brian: Because growing vegetables and other plant life would qualify.
Dave: Before we move on to some other tax strategies, what kind of dollar amounts are we talking or discounts from the real estate tax are we are talking if you approved for the CAUV?
Brian: That’s a great question. In Wayne County, I think that the discount is somewhere around 40% of market value. It depends on a lot of things. There’s 3,500 different soil types in Ohio. Part of the value is based on that soil type. The CAUV, the value, varies from soil type and it varies from each county as well. You could see savings where you pay anywhere between 20 … I think the lowest is around 20-21% of market value up to a little over 57%.
Dave: Significant.
Brian: In Wayne County, a lot of what I see is around 30% in our area. A significant amount of savings. You have farmers that are paying 20,000 of real estate taxes, which seems high, but when you consider that they could be paying 60,000 or 70,000 of real estate taxes, its substantial savings.
Dave: What would happen in a situation if you were to stop farming, maybe stop farming all the parcels under the area or you rest the field for a year or so, do you have to give it back?
Brian: That’s a good question. If you are letting a field go fallow for a year, you would not have to pay it back if your intention is to return to agricultural use. If you were to develop it let’s say or sell a parcel off to an outside party, if you remove it from agricultural use, the buyer is required to payback to the state three years of savings. It could be a couple thousand dollars that the buyer would have to repay if they are buying land that was in CAUV previously.
Dave: I think as we sit here and talk and look at your notes, you definitely are an expert and famous in the agribusiness tax strategies and planning. It’s not the same as regular business. There’s a lot of stuff that’s going on. Mind if I ask you a few questions regarding tax strategies?
Brian: No. Go ahead.
Dave: Okay. Land. Can I write-off land? I buy a parcel. Can I write it off?
Brian: That is a question I get fairly often and the answer is always no. You cannot write-off the land itself, but there are some ways that you can recoup some of your cost. A lot of times what we see is someone will buy a farm, let’s say 120-acre farm. Traditionally they’re buying a family farm. You’re going to buy 120 acres, but you’re also buying a 100-year-old farmhouse and some farm buildings and fence and other miscellaneous structures. One planning point is when you do buy a farm, we need to look at everything that’s on that parcel and potentially you can break out some of the other assets and write those assets off or at least get some depreciation out of them.
Dave: Like a farm building, the fence, bin?
Brian: Exactly.
Dave: Stuff like that.
Brian: All of those things can be written off through depreciation.
Dave: Typically, that might be included in the purchase document as one number, so you got to work hard to get the allocation.
Brian: That’s usually what we see. Not too many people are giving us an allocation of assets through a farm purchase because it’s traditionally just real estate.
Dave: What about easements? Conservation easements, utility easements, other type of easements you see? I’ve read some things on that and had some discussion and kind of confusing. Kind of a lot confusing.
Brian: It is confusing and it can get complicated. It’s not for everyone, but there are some strategies on getting some very nice tax write-offs if your intention is to conserve your land basically forever. There are ways through conservation easements that you can get a deduction for the reduced value from your fair market value, let’s say selling your land in an auction, compared to the value of the land that can never be developed. If you have a 10 acre parcel that you could sell for 10,000 an acre, it’s worth $100,000, but you put it into this conservation easement, it’s never allowed to be develop. Now the land might be worth $2,000 an acre.
You can get a deduction on your tax return for the difference of $8,000 per acre that you can use to write-off against your other income.
Dave: What type of documentation I guess … Maybe that’s not the right term, but how do you document that, verify it?
Brian: It has to be valued by someone who does valuations for conservation easements generally.
Dave: Very specialized.
Brian: Yes, it is very specialized. You have to follow some very specific rules because it turns out to be a fairly substantial deduction especially if you’re putting 100 acres into this program. You can yield some substantial tax savings. You want to make sure you have your ducks in a row before you do this and make sure you follow the letter of the law as well because when or if you do get audited, you want to be able to provide all that documentation.
Dave: You can tell by some of the questions I’m a city boy. The farm corporations don’t want a city boy doing their returns. They say, “They don’t live it. They don’t feel it. They don’t see it.”
Brian: Yeah. Exactly. I grew up on a farm and so I’m still very tied into that community.
Dave: I’ve traveled through your community quite often. As you travel you see, at least I have, a significant amount of advertising in billboards on land. I always kind of wondered how’s that handled? Obviously there’s some revenue there, but is there any other things that we would need to be aware of?
Brian: Traditionally those are done through a really long-term lease. You could see 30, 40 year leases or an easement on the property. Generally that is going to be ordinary income to the farmer. There is not a lot of planning that you can do on those.
Dave: It’s just straight income.
Brian: Exactly.
Dave: You had mentioned also earlier and I know from your practice that you deal with a lot of farms that have been passed down generation to generation to generation. The value of the land or the basis of the land is very low. Sometimes the family is faced with some difficult decisions if they have to sell the land or there’s a death. What about a gift, a gifting of land? Do you see that happening a lot in your …
Brian: Yeah. That is a good question. That’s something that a lot of farmers, especially farmers that are coming from the baby boomer generation, are facing right now is a lot of their retirement is tied up in land. There is a lot of estate planning that’s going to have to be done for the next 15 to 20 years on how does the farmer retire if they want to pass down land to the next generation. When you’re talking about gifting or giving your land through inheritance, for tax purposes, the preferred is to allow it to be passed through inheritance because you get that step-up in basis like you said. Someone might have bought land for $100 an acre 45 years ago and now it’s worth $10,000 an acre. If they were to sell it right now, they would have a substantial tax consequence.
If they’re children inherit it at their death, their basis in the land now becomes $10,000 an acre and can basically be sold tax free. Traditionally when you’re looking at the decision between gifting or selling or passing it through inheritance, we generally shy away from gifting of land for that reason, for that step-up in basis.
Dave: As a gift from family member to family member.
Brian: Exactly.
Dave: Giving it to a charitable organization, a 501c3 or c6, that goes into discussion?
Brian: Yeah. Yup. That is another very good planning point is giving of land to charities. Not every charity is going to be able to handle that, but there are certainly 501c3s out there that are willing to handle a donation of land. The benefit you get there is you get a donation equal to the fair market value at the date of the gift instead of your basis, which maybe really low. You may have purchased it for $100 40 years ago. You get to do two things. You get to take a donation equal to the fair market value, as well as escape any tax on that gain that you would have paid if you had sold it. That is a very good planning point especially if someone is looking for some tax write-offs and looking to maybe reduce their estate to pass down.
Dave: In the next few minutes, we only have a few minutes left and you just scratched the surface on some pretty significant tax planning ideas and tax strategies. The last thing maybe we could hit and we just have to just touch it briefly because of the time we have, but if I’ll go to sell some land or some acreage, do I have other options? Can I trade that land for another parcel I like and defer the taxes?
Brian: Yeah. That’s a great questions. Let’s say you live in Florida and the winters are just too hot and you want to move back to Ohio and get back to some nice cold winters. You could sell some property that you own in Florida and move back to Ohio and rather than pay tax on the property down there, you can enter into a 1031 exchange, a like kind exchange, and defer all of that gain by purchasing some real estate up here in Ohio. It doesn’t have to be land for land. It can be land for a commercial property or some other sort of real estate. That is another great option you have with land that you don’t necessarily with other investments.
Dave: How about a land for a boat and a sports car?
Brian: That one you may have to go find someone else.
Dave: Exactly. Our guest today has been Brian Kempf, principal from Millersburg, Ohio with Rea & Associates and certainly very, very famous in the area of tax strategy and tactics for land owners in agribusiness. Thanks again for joining us on unsuitable today, Brian. Great insight.
Brian: Thank you, Dave.
Dave: I’ve learned that there are many ways and many more tactics and strategies out there than I originally thought. You opened my eyes as a city boy. Listeners, I hope you’re able to walk away with some new valuable information as well. For next week’s episode, in celebration of our 100th episode of unsuitable on Rea Radio, we’re excited to feature what we’re going to call Rea’s Definitive List of 100 Best Business Resources for Business Owners. We’ve been compiling our favorite business resources and we can’t wait to share these with you. You won’t want to miss that episode. In the meantime, we’d love to hear from you, what you think of this podcast. We’d love to give you a chance to help shape the next 100 episodes.
All you have to do is send your thoughts by email to podcast@reacpa.com or tag us on Twitter using #ReaRadio. Until next time, I’m Dave Cain, encouraging you to loosen up your tie and think outside the box.