How to make $2,000,000 being a part-time farmer part 3

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.

Beautiful view of a horse farm
This could be your morning view.

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.

A penny saved is a penny earned
$500,000 is a lot of pennies

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.

 

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