Purchasing a Farm: Land Depreciation vs. Amortization

Jared Faltys

Financial planning, business tax planning, investment advisory services

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Purchasing a farm may seem like a good investment opportunity. However, with further analysis, the net return is often much lower than anticipated. This typically happens because investors also view agricultural land as a stable investment. Not to worry — there are ways to immediately improve the ROI on the land through potential tax benefits. When you purchase farmland, you may be able to depreciate or amortize various aspects of the farm. 

Amortization vs. Depreciation

When purchasing farmland, you will acquire not only the land but other assets that accompany it as well. Since many of these assets will eventually deteriorate and become unusable, their cost can be expensed based on their life expectancy. Amortization and depreciation are ways to calculate the value of these assets. 

Depreciation

Depreciation is a way to calculate the total cost of an asset over its useful life. It is used to establish the cost of obtaining the asset compared to the income it provides. Depreciation is used for tangible assets, such as buildings, machinery, or equipment. 

Amortization

Amortization is also a way to calculate the total cost of an asset over its useful life. However, amortization is used for intangible assets, unlike depreciation. Examples of intangible assets include trademarks, patents, and nutrients within the soil. 

Understanding these terms will help you during the prospecting phase of purchasing a farm, so you can be on the lookout for specific assets that you will be able to write off and gain a higher return on your investment. 

Depreciating Farm Assets

When considering a farm to purchase, you should be looking for specific structures that you file as depreciating assets to provide savings on your tax bill. Some of these structures may include fences, grain bins, farm sheds, irrigation systems, and other tools and equipment. Having the ability to write off these assets when tax season rolls around will help you offset the amount you are paying for the farm. 

Amortizing Farm Assets

Did you know that in certain instances you are able to amortize part of the physical dirt on your farmland? While uncommon, this is an approach that some choose to take and the return can be substantial. 

Overall, the general understanding of buying dirt is that you are unable to depreciate it until you sell the ground.  However, since farmland is commonly passed down throughout generations, farmers typically won’t ever see this value. 

How to Amortize Farm Assets

To amortize dirt on your land, the first step is to determine if there are more fertilizer nutrients in the ground than what is considered average. To check the levels of your land, you can hire an agronomist to collect soil samples from areas around the farm to analyze the nutrient values. 

Once you have this analysis, you can reach out to your local university’s agriculture department. Typically, they will perform studies to determine what is considered average for the embedded nutrients within their local soil. You can compare your specific dirt to the average values collected by the university to determine whether or not your land’s nutrient values are above average. If you have any values over the baseline, you can make a case that the ground can be amortized over the lifetime of those nutrients. 

McMill Can Help

Although the initial net return on farmland may not appear to be as high as you would expect, there are plenty of options to help increase your return on investment. Utilizing depreciating and amortizing assets will help you balance your return against your investment. 

McMill CPAs and Advisors are here to answer any other questions you still have about purchasing farmland. As your local experts in Norfolk, Nebraska, we can’t wait to assist you in your farming business along with other areas like tax planning, retirement planning, and risk management. Reach out to us today for more information.