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DEEPYIELDTAX STRATEGIES

Buying a Ranch or Farmland: Tax Questions to Raise Before Closing

Short answer: Before you close on a ranch or farmland, ask your CPA how the price will be split between land and improvements, which closing costs go into your basis, how any crops, livestock or equipment in the deal are handled, whether you're coming out of a like-kind exchange, and how you'll run the place. Land itself is never depreciable, so these answers shape your depreciation for years and your gain or loss when you sell.

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Unless noted, the rules below come from IRS Publication 225 (2025), Farmer's Tax Guide.

1. How will the price be split between land and improvements?

A ranch price usually covers bare ground plus fences, water wells, drainage, barns, pens and other structures. When you buy multiple assets for a lump sum, you allocate the amount you pay among the assets and use that allocation to figure your basis for depreciation and for gain or loss on a later sale. You can never depreciate the cost of land, so anything left lumped into "land" isn't depreciated at all. Many improvements may be, each over its own recovery period in Table 7-1.

Questions to raise: Will the contract include an allocation schedule? What supports the value of each improvement (an appraisal, age and condition, maps of water lines or tile)?

2. Should the contract spell out the allocation?

Publication 225 says you and the seller may agree in the sales contract to a specific allocation of the price among the assets. In Publication 225's words: "If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation will generally be accepted." Your CPA should see the allocation before you sign, not after.

3. Are you buying land, or a farming business?

If the assets you buy make up a farming business, Publication 225 and Publication 551 say special allocation rules apply, and both buyer and seller may have to file Form 8594, Asset Acquisition Statement Under Section 1060. Publication 551 adds that in a business acquisition, a written agreement between buyer and seller on the allocation, or on the value of any asset, is binding on both of you unless the IRS determines the amounts aren't appropriate. Many purchases of land alone aren't business acquisitions. Which one yours is depends on what's in the deal.

4. Which closing costs go into your basis?

Publication 551 says your basis includes the settlement fees and closing costs for buying the property, but not the fees and costs for getting a loan. Publication 225 also explains how real estate taxes split between buyer and seller at closing are treated. Keep the settlement statement; it's the main record for your basis.

5. Are crops, livestock or equipment part of the deal?

  • Crops in the field: You capitalize the purchase price of land, including the cost allocable to unharvested crops, and deduct that cost in the tax year you sell the crops.
  • Breeding or dairy cattle: Table 7-1 lists cattle (dairy or breeding) with their own recovery period. Livestock bought for resale is different: your profit or loss on farm products bought for resale is figured when you sell them.
  • Equipment: Table 7-1 gives used farm machinery and equipment its own recovery period, separate from farm buildings and other improvements, so machinery bought with the place is its own asset.

Getting each item listed and valued separately at closing makes the later reporting simpler.

6. Are you selling property to fund the purchase?

If you're giving up real property held for business or investment, a like-kind exchange under Section 1031 may be possible. The IRS says real properties are generally of like-kind whether they're improved or unimproved, that receiving money or other property in the exchange means recognizing gain to that extent, and that the exchange is reported on Form 8824. Exchanges have identification and exchange periods (IRS Publication 544), so this is a question to raise before you sell, not after.

7. How will you run the place?

If you don't carry on a farming activity to make a profit, you can no longer deduct the expenses of carrying on the activity, and expenses for activities done as a hobby, or mainly for sport or recreation, can't be deducted. If the ranch is part working operation and part getaway, talk with your CPA about how it will be run and what records to keep from day one. If the ranch will sit alongside a high-paying career, the same question applies, and your other income is one of the factors the IRS looks at. See Hobby or Business? How the IRS Looks at a Ranch. How the IRS limits a ranch loss when you also earn a salary is covered in Can a Ranch Loss Offset Your W-2 Income? The IRS Limits That Apply, in Order. Those limits are about how a loss is treated, not a reason to buy.

8. What to keep from the closing

  • The purchase contract, including any allocation schedule.
  • The settlement statement.
  • Appraisals or other support for the value of each improvement.
  • A list of any livestock, equipment or crops included, with values.
  • Exchange documents, if a like-kind exchange is involved.

Where DeepYield fits

DeepYield is a second set of eyes, not a replacement for your CPA. A free two-year look-back is a review of your last two years of tax returns, done for you, then a 30-minute call to walk through what we found. If you've bought land or a ranch in those years, that review includes how the purchase was allocated and depreciated. We don't just accept what's on the schedule. We go looking for what's missing, and what we find can go to your CPA too.

Realtors and CPAs are welcome to share this page with buyers as a list of questions to take to their own tax advisor.

Related: Farmland Purchase Price Allocation · Depreciating Farm Land Improvements · Hobby or Business? How the IRS Looks at a Ranch · Tax Planning for High-Income Earners

Request your free two-year look-back →

Frequently asked questions

Can I deduct what I pay for a ranch?

Not the land. IRS Publication 225 says you can never depreciate the cost of land. The part of the price that belongs to improvements, such as fences, water wells, drainage and farm buildings, may be depreciable over each item's recovery period, depending on your facts. That's why the allocation of the price matters.

Should the purchase contract allocate the price?

It can. Publication 225 says you and the seller may agree in the sales contract to a specific allocation of the price among the assets, and that an allocation based on each asset's value, between parties with adverse tax interests, will generally be accepted.

Are closing costs on a farm purchase deductible?

Generally they're added to your basis rather than deducted. Publications 225 and 551 say your basis includes the settlement fees and closing costs for buying the property, but not the fees and costs for getting a loan.

What happens to crops that are still in the field when I buy?

Publication 225 says you capitalize the purchase price of land, including the cost allocable to unharvested crops. You can't deduct that cost when you buy, but you can deduct it in figuring net profit or loss in the tax year you sell the crops.

Can I use a 1031 exchange to buy farmland?

It may be possible if you're exchanging real property held for business or investment for like-kind real property. The IRS says real properties are generally of like-kind whether improved or unimproved, and the exchange is reported on Form 8824. Exchanges have identification and timing rules (IRS Publication 544), so raise it before you sell the property you're giving up.

Does it matter if the ranch is partly for recreation?

Yes. Publication 225 says that if you don't carry on a farming activity to make a profit, you can no longer deduct the expenses of carrying on the activity. How you'll run the place, and the records you keep, are worth discussing with your CPA before you close.

Sources

Results depend on your specific facts. No outcome is guaranteed. This is general information, not tax advice; advice is provided only under a signed engagement.

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