Intergenerational Farm Transfers with an Accounting Partner

Jennifer McArthur, CPA, CA joins us to chat about the most common questions she hears from clients. She answers how you can approach intergenerational farm transfers, capital gains exemptions, replacement properties, and more. 

This is a great episode for farmers who are starting to think about passing their farm on to the next generation.

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Transcript

00:00:00:14 - 00:00:21:09
Speaker 1
Hello and welcome to Integrating for Success, a Ward and Uptigrove podcast. My name is Amy Noonan and I will be your host. Busy season is over and I'm excited to have our first accountant and business advisor join us today. Jen McArthur has been with Ward and Uptigrove since 2009 and progressed to partner in the Agriculture Department in 2020.

00:00:21:21 - 00:00:34:19
Speaker 1
If you didn't know, yes, Ward and Uptigrove has a specialized Agriculture Department to help farmers and agri businesses meet the reporting requirements, among many other services, as we're about to learn. So thanks for joining us today, Jen.

00:00:36:12 - 00:00:37:13
Speaker 2
Thanks for having me.

00:00:38:13 - 00:01:03:09
Speaker 1
So, Jen, from the outside looking in, I don't think some people realize just how involved and complicated running a farm or an agri business can be. I mean, there's there's organizational structure, budgeting, financing, succession planning. There's just so much to think about. What do you think? The top two things are that your clients ask you the most?

00:01:03:09 - 00:01:22:05
Speaker 2
And recently, the top two things that they have been asking are about transferring the farm to the next generation. So how do I get my farm to my children with the least amount of tax usually. And the other question they ask about it is replacement properties. So yeah, those are the top two questions that I've been asked.

00:01:22:11 - 00:01:40:22
Speaker 1
Right. And that makes sense. You know, there's it it seems like there's going to be a large transfer of wealth over the next, you know, decade to decade. So that makes sense. Is there an effective way to from attach? Okay, I'm going to redo that.

00:01:42:00 - 00:01:42:12
Speaker 1
Is there a.

00:01:42:12 - 00:01:49:11
Speaker 1
Tax effective way to transfer the farm from one generation to the next?

00:01:50:07 - 00:02:11:01
Speaker 2
And there's a few different ways that we can it's not it's not one solution fits all. So there are a few different tools. I can talk briefly about them. Most importantly, you should be contacting your accountant because they know your situation best and they will be able to lead you through these and figure out whether or not you actually qualify for them as well.

00:02:11:22 - 00:02:34:21
Speaker 2
So one of the first things we have is actually fairly new. It's a we call it Bill C208, for lack of a better term. And what it allows is a share sale. So if you own qualified farm property as a share, you can use your capital gains exemption to transfer that to the next generation and transfer that to your children or grandchildren.

00:02:36:07 - 00:02:54:21
Speaker 2
It is a little bit more complicated than the other methods and the government is imposing some new rules by the end of this year. So if this is something that you want to do. So basically it allows you to use the capital gains exemption on a share sale, which we have never had access to before. If we're doing succession planning.

00:02:55:04 - 00:03:20:24
Speaker 2
Okay. So if you are interested in that, then definitely talk to your account in the near future because yes, the rules do become a little bit more cumbersome by the end of 2023. Hmm. Okay. So that is one option. Another option is transferring qualified farm properties to your children or grandchildren. So that would be if you own a piece of property that you are farming as opposed to a share or corporation.

00:03:21:06 - 00:03:48:05
Speaker 2
So that could mean in a partnership or proprietorship you can qualify, you sorry, you can transfer qualified farm property owner grandchildren tax free because you're allowed to elect, you're allowed to elect from anywhere from cost. All the way up to fair market value. And your capital gains exemption there, I guess to backtrack your capital gain exemption for farmers or for a qualified farm property is $1 million right now per person.

00:03:48:17 - 00:04:20:13
Speaker 2
Okay. That may change in the future as things change, but as of today, that is what that is. So in order to use that, you can use again, farm property. And then the shares which we talked about, too. Right. And the next thing that's available is you can actually gift everything to your children or grandchildren. If they're if you have enough wealth from other sources and you don't need anything further, you can always gift farm property or farm shares to your children and not take back any compensation.

00:04:20:16 - 00:04:45:08
Speaker 2
That's something that we've been seeing lately, especially with land prices significantly increasing that parents just know that the next generation can't make a go of it unless they are gifted something. So that has become a lot more prominent. Hmm. Interesting. And then again, in the end, you do need to run your situation by your accountant, right? Or they know what's going to be best for you.

00:04:45:08 - 00:05:00:12
Speaker 2
They know your situation. Yeah. And those top three and those three things are just three things that are possible. There's other ways too. But those are the three most tax effective ways that you got. You can get everything to the next generation, right?

00:05:00:13 - 00:05:08:09
Speaker 1
Oh, that's so interesting. And then earlier, you mentioned replacement property. So what what do you mean by that?

00:05:09:20 - 00:05:34:14
Speaker 2
And so very simply, it means that if you sell a farm property, usually land, you can defer the taxes on that if you replace that property with another farm property. So basically land for land, buildings can be included as well. But very simply, that's what it means. Obviously not that simple when it gets down to it, but that is the simple side of things.

00:05:34:16 - 00:05:59:19
Speaker 2
Okay. So basically what happens is if you sell a property, say, November 30th, 2023, and your year ended December 31st, 2023, you have until the end of December 2024 to replace that property and defer the tax. Not that you don't have to pay any tax on it, but you defer the tax right until you sell the new property.

00:06:00:00 - 00:06:28:16
Speaker 2
Okay. Got it confusing. But yeah, just push the tax down the road. Now there is a little bit of a benefit to is that if you sell a property, say, January 1st, 2024 and your year end is December, you actually have until December 31st, 2025 to replace that property. So there is some timing and planning that can be done there to ensure that you get the best tax deferral possible.

00:06:29:02 - 00:06:50:16
Speaker 2
Right. You also would want to talk to your account about that just to make sure that you do qualify for that. And there's some rules that are in place for the replacement property and what qualifies and and how you can replace it. Is it acre for acre or is it dollar for dollar? It kind of depends on your specific land and buildings that are being sold.

00:06:51:00 - 00:06:55:05
Speaker 2
So it's another thing that really needs to be run by your accountant before you do it.

00:06:55:19 - 00:07:10:02
Speaker 1
Right. Well, I'm glad you mentioned that, because in my mind it was going okay. Well, what if one is more expensive than the other and how does that work? So yeah, it definitely sounds like if you're considering that, you need to speak to your accountant. It just it sounds very complicated.

00:07:11:18 - 00:07:30:03
Speaker 2
Yes, it can be. And the one thing you need to remember, too, is not all of these plans now that replacement property is fairly, fairly quick that you can talk to your accountant fairly soon before you do something like that. But some of the other plans, like a bill C208 there is planning that needs to be done and there is some transition that might take up to five years.

00:07:30:03 - 00:07:58:19
Speaker 2
So if you're thinking of something or thinking of transition, being either selling a property and transitioning to the next generation, start that conversation with your accountant now because there is some time that might have to go in. So yeah, like Bill C208, you do have to keep things in place and you might have to stay in control or in the business for five years and some of the other ones getting access to your child's capital gains exemption.

00:07:58:19 - 00:08:18:13
Speaker 2
They have to hold a property for three years before they can sell it. So there's there is timing that needs to be put or that needs to be considered. So it's important to just talk to your accountant upfront so that you guys can decide on the timeline that's best and works best for you so that you can complete your transition as you would like.

00:08:18:19 - 00:08:40:12
Speaker 1
Right. I think that's a great point. And actually it ties back into the previous episode, I think, with Luke MacLennan talking about financial planning and just like having that plan and being on top of things. So you know what to expect, what you need to do, you know, it may not turn out exactly as you expect, but you know, the more you think about it in advance, the better.

00:08:40:12 - 00:08:54:15
Speaker 1
So I think that's excellent. Well, Jen, I think that's all the questions I have for you today. Hopefully we have some farmers who are going to have a listen. I think they'll find this incredibly helpful. So thank you so much for taking the time to join us today.

00:08:56:22 - 00:08:58:08
Speaker 2
No problem. Anytime.