Ninja Cow Farm LLC

Easily the number one reason to be a gentleman farmer is for the tax savings. Yes, I know it’s all about getting back to nature, letting the kids run free, growing your own food. Yeah, yeah, all that is true. But at the end of the day, the world isn’t run by happy feelings and beautiful sunsets, it’s run by dollars. I’m actually hesitant to put this topic down in print for fear somebody will use it as a basis for changing the laws on farming and farm status. But nothing I’m saying here isn’t well documented and well known within the tax and farming communities.

But before we talk about tax savings, lets talk about what it means to be a farmer, or specifically a gentleman farmer. This is a term I was introduced to by my farm insurance agent. To be a gentleman farmer means someone who owns a farm but actually doesn’t really farm all that much. Maybe you play at it, or maybe you are serious about one aspect but that doesn’t cover the costs of your entire farm. A hobby farmer would be another description people use. Basically anyone who makes their money from off farm, but still plays at farming a bit on the side while losing money at it would be a gentleman farmer.

But what about being a farmer as far as the government is concerned? Does your garden count if it’s big enough? What if you have horses? How do I make sure I’m counted as a real farmer? There was a time when it was fairly difficult to be qualified as a farmer in North Carolina. There wasn’t much, outside of being a large row crop or livestock farmer that counted but over the last few decades, the law has marched steadily towards making more and more land eligible for farm status. The best writeup on farming and farm status I’ve seen is located here. Since this link is a blog for lawyers, I’ll grab a quick excerpt from the post as a summary in case you don’t read the post (you should).

The latest law affecting farmers and farm status was passed in 2011.

The act provides a “safe harbor” by listing five forms of verification, any one of which is sufficient to qualify a property for the bona fide farming exemption. The items of proof include (a) a farm sales tax exemption certificate; (b) a copy of the property tax listing showing that the farm qualifies for the present-use-value property taxation that apples to agricultural, horticultural, and forestry uses; (c) a copy of the farm operator’s federal income tax form that demonstrates farm activity; (d) a forestry management plan; or (e) a farm identification number issued by the U.S. Department of Agriculture. Several of these safe harbors—qualifying for present-use-value taxation (item b), filing an IRS form demonstrating farm activity (item c)—even obtaining a farm sale tax exemption certificate—involve the regulatory authority of either the state or federal government.

What this says is if you file a schedule F on your tax return, which you would do so you can write off your farming expenses, you qualify as a bona fide farm under NC law. Or if you register your farm with FSA which you are required to do, you qualify. Since you are likely buying an existing farm, you just need to update your contact information at the local FSA office. At that point, bam! You are a farm. Basically, if you are farming at all, you are a bona fide farm. Period. That was the purpose of the law, to clearly define what is and is not a farm so that individual regulatory agencies in our 100 counties would once and for all leave farmers alone.

However some of these exemptions are circular. You want to be a “bona fide farm” so you can get your sales tax exemption, which is one of the ways to be a bona fide farm. It’s not as confusing as it sounds. In our next post, we’ll walk through your sales tax exemption.

 

In our previous post we talked about how to be a bona fide farm. In this post, let’s take a look at how to get your farm purchases exempt from sales tax.

Qualifying farmers are exempt from sales tax on many items that would be used on a property. Planning on getting a John Deere Gator to survey the property (and let the kids have fun)? That’s a farm vehicle. Need feed for your horses? Tools for the garden? Tools for your construction projects on the farm? All exempt from sales tax IF you qualify. There is a great write-up on what it takes to qualify and how to get it done on CFSA’s website. However the summary is this. You need $10,000 in revenue on your farm to qualify for a sales tax exemption. Either all in one year, or averaged over three years ($30,000 total over three years). There is no provision about maintaining this level of revenue going forward. It appears that once you qualify, you are done as long as you maintain your farming status.  Understand, I’ve not seen this tested yet and as this new requirement appeared suddenly out of the legislature, it wouldn’t be difficult to imagine being required to demonstrate it again at a future date.

$10,000 is a lot of revenue to produce by a gentleman farmer who already has a job and doesn’t want to farm full time. However it is revenue, not profit. Do you have 30 acres of pasture? Buy 10 cows in the spring and sell them in the fall. They cost, per the last market report, $2.00 per pound at 400 pounds. After grazing all year, they weigh about 800 pounds and sell for $1.48 per pound which is $1184 per cow. Multiply times 10 and you have $11,840 in revenue, done and documented through a third party sale.

After paying trucking, a local farmer to manage the cows for you, putting in or repairing fencing, maybe some hay, did you make money? Who cares? You are now tax exempt on sales tax for the next 30 years, and now you know your neighbor the cattle farmer and your local stock yard, both very good people to know.

What if you cannot keep 10 cows? What if it’s only 5? Buy them in the spring, sell them in July and buy another 5 at the same sale. Then sell those five in the fall. For the year, you’ve sold 10 cows so you still have the same amount of revenue. Nobody said you had to be a smart farmer, or a profitable farmer, just that you are farming. Don’t want cows? Cut some of the timber to get a better view and sell it. Daughter getting married? Charge her for the use of your shiny new farm as a wedding venue. Pay the income tax on the agritourism income, and call it done. You can gift her the $10,000 under the annual gifting exclusion anyway and the money ends up right back where it started. Obviously you want to be above board with what you do. You want everything to be legitimate and able to withstand scrutiny but the point is there are ways of generating revenue without having to sit at the farmer’s market selling produce.

Now that you have your sales tax exemption, it’s time to talk about the big topic, property tax exemption or “present use value.” That will be our next post.

If you drive a car, I’ll tax the street
If you try to sit, I’ll tax your seat
If you get too cold I’ll tax the heat
If you take a walk, I’ll tax your feet

Lyrics from “Taxman” by The Beatles

In our previous posts we talked about sales tax exemption for farmers and how to qualify as a bona fide farm in North Carolina. Now comes the biggie. Property tax. Farmers who meet the requirements are allowed under NC law to pay taxes on their farms at their Present Use Value (PUV). This means that if you paid $10,000 per acre for your farm, but it qualifies for PUV, you pay taxes on the farm at its rentable farming value instead which is more like $100 per acre! We’ll compare the taxes on a sample farm, but first let’s talk about what it means to qualify.

First, the NC Department of Revenue has put out a thorough book on PUV and you can find it here. It’s straightforward and easy to read but it is daunting at roughly 200 pages. If reading through this is too much, you can attend (and you should) the Wake County Soil and Water, Keeping the Farm Workshop that is put on each year during the winter. It’s free and packed full of information on how to keep your farm viable. All Wake County registered farm property owners receive an invite but if you contact the Wake County Soil and Water department, they will make sure that you receive the information to RSVP to the next event.

But for now, let’s have a quick summary of what qualifies. For horticulture, you need 5 acres in production. For general farming, you need 10 acres in production. For forestry, you need 20 acres in production. If you have a house, you must deduct 1 acre from the farmland for the house itself. Your house and it’s acre are not “in production.” This is the most common mistake that new owners make in my experience, not realizing the 10 acre rule and that the house doesn’t qualify towards the total.

Also any non-usable land would not count against your needed in production total. It can still be in PUV once you qualify, but you can’t have 3 acres of wetland that you can’t use and only an 11 acre farm with a house as you’d only have 7 acres in production. (11 acres total, minus 1 acre for the house, minus 3 acres of non-production land).

You also cannot have 6 acres in cropland/pasture and 10 acres in forestry. These are not cumulative numbers. You must meet one of them individually. (6 acres of cropland/pasture doesn’t meet the 10 acre threshold, 10 acres of forestry doesn’t meet the 20 acre forestry threshold). Should you timber four acres of your forestland and put it into grazing/cropland production, getting you a total of 10 in production, then you’d be able to qualify going forward. As you can see it can get sticky quick. The most common issues concern only general farming in my experience and the 10 acres needed. Just don’t forget to subtract the acre for the house.

My experience with the NC Department of Revenue is that they are very firm but very fair. If you meet the numbers, no problem. If you miss it by .01 acres, sorry. Pay up. There is no grey area. They seem to be very open about what the rules are, and they are willing to look at whatever your situation is but they will decide based on the letter of the law and nothing else. Make sure your property meets all the requirements with room to spare.

So let’s say you qualify for PUV, what does that mean exactly. Let’s take an example of a farm that is currently valued at two million dollars for the land only. That farm, under normal property tax rules, would have an annual tax bill of $13,430 for the farm land only. Under PUV the tax bill is about $180 meaning a savings of $13,250 per year on property taxes. Since farmland is where all the development ends up going, you can assume that property values will rise over the years meaning that the PUV savings will only increase year after year as the disparity between farming values and development values grow.

So how do you make $2,000,000 being a gentleman farmer? If you take your $13,250 per year of PUV savings, and tack on about $20,000 annually of sales tax exempt purchases that means you’ll not pay $14,600 annually in taxes. These are taxes you would have otherwise paid on normal property. If you live on your farm, as my father did and as I have, for over 30 years, then you’ll save $438,000 in today’s dollars. Since that two million dollar farm today was worth about $350,000 30 years ago, we can expect a similar increase over the next 30 years. Factoring in the increased PUV savings as property values go up, it means we can safely round our number up to $500,000 easily. Then tack on the $1,650,000 gain in value of the farm itself and you’ve increased your net worth by over $2,000,000 all while having this view every day.

But wait, you say your fancy McMansion would have increased in value as well so that’s not a good comparison? First, it’s debatable that it would increase at a similar rate. Farmland generally sells for development at well beyond its tax value where houses sell at a much closer price to their tax value. The appreciation has already been realized. But second, you’ve not paid $500,000 in property taxes compared to the McMansion so it is still a net gain of half a million dollars, even if everything else is the same.

Saving half a million dollars in taxes over time is significant. When you couple the lifestyle advantages of having acreage, the freedom from regulation, the freedom from neighbors, and the health benefits of being on the farm, investing in farm land for your family makes both financial and emotional sense.

 

In our previous posts, we’ve discussed how to become a bona fide farm, how to qualify for a sales tax exemption, and how to qualify for Present Use Value (PUV) for property tax deferment.

So let’s say your property qualifies for PUV, what does that mean to you exactly? Let’s take an example of a farm that is currently valued at two million dollars for the land only. That farm, under normal property tax rules, would have an annual tax bill of $13,430 for the farm land only. Under PUV the tax bill for the same land is about $180 meaning a savings of $13,250 per year on property taxes. Since farmland is where all the development ends up going as a city grows, you can assume that property values will rise over the years. This means that the PUV savings will only increase year after year as the disparity between farming values and development values grow.

So how do you make $2,000,000 being a gentleman farmer? If you take your $13,250 per year of PUV savings, and tack on about $20,000 annually of sales tax exempt purchases that means you’ll not pay $14,600 annually in taxes. These are taxes you would have otherwise paid on normal property and often purchases are made at a similar rate (a boat instead of a Gator). If you live on your farm, as my father did and as I have, for over 30 years, then you’ll save $438,000 in today’s dollars. Since that two million dollar farm today was worth about $350,000 30 years ago, we can expect a similar increase over the next 30 years. Factoring in the increased PUV savings as property values go up, it means we can safely round our number up to $500,000 easily. Then tack on the $1,650,000 gain in value of the farm itself and you’ve increased your net worth by over $2,000,000 all while having this view every day.

But wait, you say your fancy McMansion would have increased in value as well so that’s not a good comparison? First, it’s debatable that it would increase at a similar rate. Farmland generally sells for development at well beyond its tax value where houses sell at a much closer price to their tax value (the increase in value is already realized by the time houses are built). But second, regardless you’ve not paid $500,000 in property taxes compared to the McMansion. It is still a net gain of half a million dollars, even if everything else is the same. Anytime you can save half a million dollars, you are money ahead.

Saving half a million dollars in taxes over time is significant. When you couple the lifestyle advantages of having acreage, the freedom from regulation, the freedom from neighbors, and the health benefits of being on the farm, investing in farm land for you and your family makes both financial and emotional sense.

6. Amazon Prime.

What does Amazon have to do with farming? Everything. The internet has shrunk the world and changed what it means to “be at work” or to go shopping. Even though he city is now pretty close to us on our farm, and stores are an easy drive away, Amazon is still my go to choice for things we need. This is a game changer for living in the country. You can have access to the world at your fingertips with the power of the internet. You can telecommute, you can video conference, you can even learn about being a farmer all from your computer while out in the country. Being “stuck in the boonies” isn’t the curse it used to be. You can be as connected to the world as you like, then turn off the computer and have this. 

7. Taxes

Taxes are their own topic. Heck, they are their own profession. Suffice to say, tax savings are the number one reason to own a farm, a topic thoroughly covered in these posts.

8. Work on what you want to

There is a lot of work owning a farm. Period. There is no way around that. If you don’t like cutting the grass on 1/4 acre, you won’t like 100 acres. However, it’s not all toil and drudgery. If you have a large farm, maintain your house as you like and lease out the rest of the farm to another farmer. You get the income, they get all the work. Lawn maintenance services can knock out big jobs like yours more efficiently than small jobs. The price isn’t too bad. Repairmen are still available just like for your suburban residence. Pretty much anything that needs to be done can be outsourced.

Or you can tackle the things you like and enjoy, improve your skill set, teach your kids a new skill, and drop that blood pressure again. There is no substitute for having a barn, the right tools, and some time to sit and work on something that matters to you. 

9. Hunting, fishing, hiking, etc.

For some people, these would be the first things they’d list. I spent many hours fishing the ponds on our farm growing up, yearning to be Bill Dance and have a Ranger boat some day. When I got older, I finally bought a boat and went to the lakes to fish like a real fisherman. I learned that the fishing I’d been doing my whole life was so much better than what I could do on the lake and promptly sold my boat. A private pond is a treasure, one that you and your kids will enjoy. Deer plots, bird watching, honey bees, trapping, whatever your fancy, having a farm allows you to pursue and manage for the betterment of that activity. And usually there is an assistance program that will assist you in putting in the needed resources like wildlife habitats, be it cost assistance or technical advice. Putting land back to nature benefits not only you and your family, but the environment as well.

10. Do something tangible

When my father bought the farm, I couldn’t understand it. He worked 60 hours a week minimum. Then he came home and worked another entire job on the farm. He said it helped him relax and to think clearly again. To me, relaxing was sitting on your butt watching TV. But when I got older and entered the working world, I learned that work was challenging in ways I didn’t appreciate as a kid. I found that coming home to the farm, and spending some time on a tangible project was magical. Seeing the results of my labor, even if it was simply the clean rows of a freshly mowed pasture, was very fulfilling in ways that doing my latest TPS report could never provide. Seeing a newborn calf, or a new section of fence installed focused my mind and let me clear away the junk that had accumulated during my week. Over the years I’ve seen companies have corporate retreats. I was even invited on a few of them but politely refused. I never understood corporate retreats because why would I go on a retreat when I could simply go home to the farm. That’s where my real thinking was taking place.

I put farmer in quotes in the title because odds are, you aren’t really thinking of being a production farmer. 1000 acres of row crop land, selling to the commodities market, getting your pesticide applicator’s license, and living on minimum wage when we calculate your hours spent vs. your actual return. No, you’re not talking about being a farmer in the traditional sense. You’re looking to be a “gentleman farmer” which is someone who owns a farm, works the farm as he/she pleases, and makes the majority of your income from an off farm source.

Why a gentleman farmer? Whatever it is that you do, you’ve had enough success that you can afford to improve your lifestyle and that of your family. And there is just something about having some acreage that you can call your own that sounds appealing. But will it be really? What is it like to be a farmer? Should you really make the leap?

I can tell you, because nearly 40 years ago, my father decided to return to his agrarian heritage and bought a farm. I moved, at age 7, away from my friends, my neighborhood, and all that I knew. Our farm is 84 acres and operated then as a horse and cattle farm. It now, under my ownership, operates as a pig and cattle farm.

When I was a kid, living on a farm meant you were cut off from the world, and not in a good way. We had three channels of television, computers with no internet (for a period of time), no easy delivery of goods (no Amazon Prime memberships), no friends close by, and no cell service (once that became a thing). When you were on the farm, you were definitely cut off from the world. Of course, for parents who worked stressful jobs, this was part of the appeal. But that feeling of being “out there” can become a burden. If you are used to a 5 minute trip to the grocery store, turning it into a 35 minute trip can get old fast when you’ve forgotten the cranberry sauce. Will being out in the country really be better? In today’s modern world, the answer is a resounding yes!

So here are ten reasons you should move to a farm.

1. There is no substitute for owning acreage.

The freedom it gives you is beyond measure. Owning all that you see, having a buffer between you and your neighbors. The ability to quietly enjoy the sunset with your loved ones with no distractions from the neighbors loud music. It’s all as real as the pictures seem and something that suburban life can’t compete with.

2. It’s for the children.

Maybe your kids are still relatively young. Maybe they’ve gotten a bit older by now. Whatever age they are, being on the farm is good for them. Do you want your kids to look like this?

Or like this?

Guess which one is better for them. Guess which one makes real memories.

Remember being told to be home when the street lights come on when we were kids? With acreage, kids can go outside and be kids. They will get poison ivy, cut and scratch themselves, build tree forts, and learn a million skills that make for healthy adults. I’ve never met a farmer who was a helicopter parent.

3. Farming is good for you.

When I sold my company and started farming full time, my blood pressure dropped 36 points in just a few months. Yes I still have stress. Yes things still go wrong. And you may not be ready to stop working, but the benefits of being outside and on the farm can improve your health anyway. Even short bouts of outdoor exercise can have a dramatic affect on your mental and physical well being.

4. No Home Owners Association (HOA)

Is your mailbox the wrong color? Did your grass get 1/2″ too tall while you were on vacation and you received a letter? Can you not park your boat in your driveway? These kinds of issues simply don’t exist on a farm. Your land, your decision. Your neighbors don’t know, don’t care, and can’t do anything about it anyway.

5. No zoning or government interference.

This is simply my favorite topic in farming. Nearly everyone I meet with the government is actually here to help me. Not that I meet many government people. In North Carolina, farmers enjoy a myriad of exemptions from regulation and zoning (see link above for the list). It’s part of the reason that farming is so active in North Carolina.

We’ll cover 6-10 in our next post, part 2.