Do I Have to Allocate Real Estate Taxes on Farm Rentals?

by Michael Evans

The Internal Revenue Service (IRS) allows you to take tax deductions on certain farm business expenses, including real estate taxes. You can typically take a tax deduction for sales and property taxes paid on farm property. In the majority of cases, you must allocate expenses according to property usage in order to take a tax deduction. The complexity of the allocation process can depend on the amount of your farm property used for your own agricultural business, personal use and rental activity.

Allocation of Expenses

If you live in a home on your farm, the IRS requires you to allocate expense deductions according to business or personal use. For example, your farm business property may account for 75 percent of your real estate tax costs, while your home may only account for 25 percent of real estate tax expenses. The IRS allows you to deduct real estate taxes when filing your farm tax return. Since real estate taxes qualify as a business expense, it typically serves your best interest to claim the deduction. Property tax assessments often itemize valuations, which may simplify the allocation process.

Allowable Deductions for Real Estate Taxes

The IRS allows you to take a tax deduction for local and state sales taxes. If you purchase land you can deduct the sales tax paid during the tax year you purchased the land. You can also take a tax deduction for the amount of money spent on property taxes. If you own a home on the farm, and only rent a portion of your property to another farmer, you must allocate your tax deductions according to the percentage used for personal use and the percentage of land rented to the farmer.

Rental Real Estate Income

You must report any income you receive from rental real estate, which may include monthly rent payments, security deposits and advance rent payments. If your tenant pays for certain expenses for which you are contractually liable, such as repairing an irrigation system, you must report the amount of the expense as income. If you allow your tenant to pay your real estate taxes in lieu of rent, you must report the amount of tax paid by the tenant as income. However, the IRS still allows you to take a tax deduction for property taxes. In such cases, you may need to allocate your real estate tax costs, if the property is commingled for multiple uses.

Passive Losses

If the expenses on your farm rental property exceed the income earned, you may qualify for a passive loss tax deduction. In such cases, you can typically include the cost of real estate taxes on the rental property as a business expense. If the rental real estate is commingled with other farm property, or property you use personally, you must allocate the real estate tax expense. For example, if you rent 50 acres of a 1000 acre farm, and the rental activity produces a loss, you may qualify for a passive loss deduction for the portion of expenses allocated to the rental land. However, you can only claim a passive loss based on total expenses and income from the rental property.

About the Author

Michael Evans was born in Memphis, Tenn. He graduated from The University of Memphis, earning a Bachelor of Arts degree in communication. His primary course of study was photography and film production. He first began writing professionally for iOwn Inc. in 1997, and was published by LensWork Magazine in 2003.

Photo Credits

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