Farmland is often the most valuable asset on a dairy operation. But when it comes to transferring, leasing or protecting real estate, many farmers don't realize how complex the legal and tax implications can be.
On a recent Dairy Stream podcast, attorney Will McKinley, president and CEO of the Menn Law Firm, shared insights on real estate ownership, succession planning, lease agreements and emerging challenges facing farmland owners today. Here are some of the key takeaways.
Real estate is more than just dirt
When farmers think about real estate, they often think only about land. Legally, however, real estate can include much more than that.
Buildings, easements, leases and other rights associated with a property may all be treated separately from the land itself. In some cases, farm buildings and improvements are owned differently than the underlying real estate for tax and depreciation purposes.
That distinction can create challenges when land is sold or transferred to the next generation.
"Many people assume that if they're buying the land, they're automatically buying everything on top of it," McKinley said. "That's not always the case."
Understanding different types of land ownership
Ownership structure matters, especially when multiple family members inherit farmland. Some common forms of ownership include:
More farm families are also placing land into LLCs and other entities. This can simplify ownership transfers and succession planning while providing additional management flexibility.
A tax term every farm family should know: Step-up in basis
One of the most important tax concepts tied to farmland is the "step-up in basis." When land passes to heirs after an owner's death, the property's tax basis is generally adjusted to its current market value. This can significantly reduce future capital gains taxes if the land is sold.
Because farmland values have appreciated dramatically over time, failing to account for basis considerations can result in major tax consequences for future generations.
McKinley emphasized that decisions about transferring land should never be made without understanding both the legal and tax impacts.
Land transfers require more than a handshake
The legal document used to transfer real estate is a deed.
Two common types include:
Quitclaim Deed: A quitclaim deed transfers whatever ownership interest a person may have in the property without guarantees about title, liens or ownership claims. These deeds are often used for family transfers or transfers between related entities.
Warranty Deed: A warranty deed provides assurances that the seller actually owns the property and that the property is free of undisclosed ownership claims or liens. For buyers, warranty deeds generally offer significantly more protection.
Why title issues can delay farm transfers
One of the biggest challenges in large farm transactions can be verifying ownership history. Many farms consist of dozens of tax parcels that may not have changed hands for decades. Before lenders and title insurance companies approve a transaction, ownership records often need to be reviewed and verified.
This process can take time and can delay transfers that families expect to move quickly. Planning ahead and working with experienced professionals can help avoid surprises.
Adverse possession: When a neighbor can gain rights to your land
Adverse possession is often referred to as "squatters' rights." In agriculture, it most commonly occurs when neighboring farmers unknowingly cultivate beyond property boundaries for many years.
Examples include:
If a landowner allows these actions to continue for decades without objection, the neighboring party may eventually gain legal rights to that property.
The good news is that landowners can often protect themselves by documenting permission for the use or addressing boundary concerns before they become legal disputes.
Competition for land is creating new challenges
One of the fastest-growing issues McKinley sees is increased competition for farmland. Data centers, solar developments, residential expansion and other commercial projects are pushing land values higher than many producers have ever seen.
While higher land values can strengthen balance sheets, they can also create tension within farm families. For example, non-farming heirs may favor selling land for millions of dollars, while farming heirs depend on that land to continue operating the farm.
As development pressure grows, succession planning conversations are becoming even more important.
Don't lease land without a written agreement
One of McKinley's strongest recommendations was simple: Get it in writing.
Handshake agreements remain common in agriculture, but they can create major problems if land changes ownership.
Without a written and recorded lease agreement:
A written lease helps protect both parties and creates clarity if circumstances change.
What farmers should look for in contracts
Whether evaluating a solar lease, wind agreement, easement or purchase option, two contract provisions deserve special attention:
1. Contract length
How long are you committing the property? Some agreements can tie up land for 10, 15 or even 20 years.
2. What happens at the end?
If infrastructure is built on the property, who removes it?
Farmers should clearly understand:
Those details can have long-term consequences long after the original contract is signed.
The bottom line: Have a plan
If there was one message McKinley repeated throughout the conversation, it was this:
Document your intentions.
Whether it's a succession plan, a lease agreement, a transfer strategy or a contract with a developer, putting plans in writing can help ensure your wishes are carried out and reduce conflict for future generations.
Farmland is often a family's largest asset. Taking the time to build a thoughtful legal and tax strategy today can help protect both the land and the legacy built upon it.