Being honest

[WestTNguy]

I have debated posting this. I have read, prayed, calculated, computed and brainstormed more in the last several months than I believe I ever have.

I decided to post this, because I feel like even with the anticipated criticism, I can still gain some valuable knowledge from you all. I am very impressed with the depth of knowledge in this forum.

I was introduced to farming, and cattle from a young age, but never had the time or money to put into it until recently. I fully believe that if my best friend hadn't asked me to come to college with him so "we could party together" that I would be farming right now. That's just what you did where I come from. From that, I have been fortunate enough to make a pretty damn good living in the medical field. I ended up dating the right girl who taught me how to study and I ended up where I'm at. I do well, but I am not rich. And I have a lot of debt that came with my education.

Now that my life has finally settled, and I am back home, I have met several neighbors who farm and they reignited the flame to get into it.

After doing some research, and I'm just going to be frank, the tax exemptions from farming almost look too good to be true. I get eaten alive every single year. I've easily paid half a million since finishing school. I have the time to do this, but the knowledge is something I am still working on. I want to lay out my plan, and see what you guys think. I have read every article that I can find on the UT extension website. I have watched hundreds of hours of video. I have spent time on my neighbors farms. I have talked to tax advisors. I have taken the states Master Beef program. I got my BQA certification. But I want unbiased opinions.

I am planning on buying 37 acres. 5 are pasture, 11 are tillable, and 18 are timber. I want to use 2 acres to build a house. I had a guy look and they will be able to harvest some timber for profit. I don't know how much. For the rest, I will buy a dozer and finish to use for pasture. I hope to build some equity. Obviously shelter, fencing, water, etc will be installed at some point also. These will all be wrote off. I hope this is making sense...

In the midst of all this, is where the cattle comes in. My plan is to buy steer calves each year to raise and sell. But really, I have no idea what to do here. My eyes cross thinking about it. My thought was that they would be more manageable for someone with no experience, and still show that I'm actively farming. Again, taxes are my main goal. Any "real" profit generated would just be a cherry on top. If anyone has some insight, I would love to hear it. I've never gone into anything half-assed and I don't intend to start now. This plan of mine makes sense, but I've been wrong before.

Thanks in advance.

 

[Bright Raven]

Don't do it if your primary objective is to deduct a farming loss on your federal and/or state income taxes. (I don't think TN has an income tax).

Just as an example:

A person spends $50,000 to record a $5,000 deduction against their other income.

The $5,000 deduction does not justify a $50,000 expenditure. Granted, you build equity to some extent but the math doesn't work out.

 

[HDRider]

Where in W TN are you, Jackson or there about?

 

[WestTNguy]

Don't do it if your primary objective is to deduct a farming loss on your federal and/or state income taxes. (I don't think TN has an income tax).

Just as an example:

A person spends $50,000 to record a $5,000 deduction against their other income.

The $5,000 deduction does not justify a $50,000 expenditure. Granted, you build equity to some extent but the math doesn't work out.

We don't have an income tax, but where they get you is the high sales tax. If I get approved, I can get the Farm sales and use tax exemption. Saving 8.5 - 9.75% on certain things sure sounds nice.

And writing off some of the mileage on my truck would be great too. I put 15,000 miles on it this year just running back and forth to town to get material for my house Ive been remodeling. I'm sure I could find an excuse to pick up something farm related while I'm in town.

The state also offers a grant through TAEP. To qualify you have to posses 30 head at some point throughout the year. They pay a pretty penny for things like fencing, barns, equipment etc. You also have to be active for 5 years.

 

[WestTNguy]

Where in W TN are you, Jackson or there about?

I'm pretty close....

 

[farmerjan]

If you are back "home" talk frankly to someone you know, about it. Maybe ask to talk to their tax person, not about them, but to get insight into the ins and outs from an actual tax persons' perspective. One other thing you might consider, having someone else rent the "farm" to give you a small but definite income, to qualify for all tax advantages on land use taxes, and then to see if the write-offs can still be applied to the "farm" but with someone else taking the risk with the animals.
Alot of "richer" people do buy farms and use them for write-offs. But many of us that actually do the farming don't like the rich write off people because they inflate the value of the land, which we know that the farming enterprise cannot possibly support the price of the land and farm. I get that you work and make a fairly decent wage and that you are seeing it get eaten up by taxes. Land is always an investment, and a hedge against the future of this country that may just go totally nuts if some of the socialistic policies get implemented. You may just need that farm to produce enough food to eat and keep your family alive if the tax situation continues to get worse and the gov't keeps wanting to tax the "rich" in order to give everything away to the "less fortunate" for free.

I really think an accountant, with tax knowledge of farming, would be the best bet for some real advice. If you are thinking to have this be your future home, then you are basically buying a large plot of land for your home, and then develop the rest for ways to reduce your taxes.

Another thing to consider. All the tax things aside. You are not going to be able to run very many head on that place. 37 acres total.....2 for the house, 5 pasture, 11 tillable, 18 in timber. It will take a couple years to get the timber all cleared and make a good pasture. What are the plans for the tillable? If you are planning to buy in the spring sell in the fall, the tillable can be just grazed. So say you have 30 grazeable acres, just for round figures. You will not be able to run more than 1 head per acre, with some rotational grazing, hedging against a year of drought, or too much rain, or something. If you buy 500 lb steers at todays' prices they are going to cost about 1.40 lb. That's 700 each. X 30 =21,000. If NOTHING goes wrong, in a perfect scenario.... they will gain 1-2 lbs per day........ So say 5 months=150 days. 2 lbs per day = 300 lbs. Now they weigh 800 lbs. They will be worth 1.25-1.30 lb at that weight. So at 1.25 that's 1,000 each . That's 300 each for 5 months work of grazing..... NOT COUNTING..... mineral, fly control, problems like pinkeye, getting loose and having to go chase them somewhere, doctoring for a sore foot, maybe some pnuemonia of something that will require a catch pen and head chute...vet costs at 100 per hour at least.... (infrastructure costs) ......not getting the weight gain, and losing one or two on occasion which happens to all of us.......
So you spend 21,000 on 30 animals, get back 30,000 on 30 animals, figure in all your initial cattle costs.... and you might actually see 20-25,000 in a good year. You have spent COUNTLESS hours at (what is your time really worth?) ????? Yes, you can lose money legitimately, for a tax write off......
And realistically, you are looking at more like 20 head on very good grazing. More like 1 head per 2 acres .....so do the math from there. The grazing will have to be planted on the timbered acres, it will not be very productive for a couple years as the stand of grass develops into a good sod.
This is not "done to scale". But it is trying to give you some very very generalized numbers. Is it really worth it? A tax expert can tell you that in your income situation. But again, if you are going into this to lose money, then yes, you can easily do it.

 

[TCRanch]

Agree with Jan. Do you have a good CPA? Have a frank discussion with him/her, including depreciation.

 

[WestTNguy]

If you are back "home" talk frankly to someone you know, about it. Maybe ask to talk to their tax person, not about them, but to get insight into the ins and outs from an actual tax persons' perspective. One other thing you might consider, having someone else rent the "farm" to give you a small but definite income, to qualify for all tax advantages on land use taxes, and then to see if the write-offs can still be applied to the "farm" but with someone else taking the risk with the animals.
Alot of "richer" people do buy farms and use them for write-offs. But many of us that actually do the farming don't like the rich write off people because they inflate the value of the land, which we know that the farming enterprise cannot possibly support the price of the land and farm. I get that you work and make a fairly decent wage and that you are seeing it get eaten up by taxes. Land is always an investment, and a hedge against the future of this country that may just go totally nuts if some of the socialistic policies get implemented. You may just need that farm to produce enough food to eat and keep your family alive if the tax situation continues to get worse and the gov't keeps wanting to tax the "rich" in order to give everything away to the "less fortunate" for free.

I really think an accountant, with tax knowledge of farming, would be the best bet for some real advice. If you are thinking to have this be your future home, then you are basically buying a large plot of land for your home, and then develop the rest for ways to reduce your taxes.

Another thing to consider. All the tax things aside. You are not going to be able to run very many head on that place. 37 acres total.....2 for the house, 5 pasture, 11 tillable, 18 in timber. It will take a couple years to get the timber all cleared and make a good pasture. What are the plans for the tillable? If you are planning to buy in the spring sell in the fall, the tillable can be just grazed. So say you have 30 grazeable acres, just for round figures. You will not be able to run more than 1 head per acre, with some rotational grazing, hedging against a year of drought, or too much rain, or something. If you buy 500 lb steers at todays' prices they are going to cost about 1.40 lb. That's 700 each. X 30 =21,000. If NOTHING goes wrong, in a perfect scenario.... they will gain 1-2 lbs per day........ So say 5 months=150 days. 2 lbs per day = 300 lbs. Now they weigh 800 lbs. They will be worth 1.25-1.30 lb at that weight. So at 1.25 that's 1,000 each . That's 300 each for 5 months work of grazing..... NOT COUNTING..... mineral, fly control, problems like pinkeye, getting loose and having to go chase them somewhere, doctoring for a sore foot, maybe some pnuemonia of something that will require a catch pen and head chute...vet costs at 100 per hour at least.... (infrastructure costs) ......not getting the weight gain, and losing one or two on occasion which happens to all of us.......
So you spend 21,000 on 30 animals, get back 30,000 on 30 animals, figure in all your initial cattle costs.... and you might actually see 20-25,000 in a good year. You have spent COUNTLESS hours at (what is your time really worth?) ????? Yes, you can lose money legitimately, for a tax write off......
And realistically, you are looking at more like 20 head on very good grazing. More like 1 head per 2 acres .....so do the math from there. The grazing will have to be planted on the timbered acres, it will not be very productive for a couple years as the stand of grass develops into a good sod.
This is not "done to scale". But it is trying to give you some very very generalized numbers. Is it really worth it? A tax expert can tell you that in your income situation. But again, if you are going into this to lose money, then yes, you can easily do it.

This is what I was looking for. Thank you.

 

[Jeanne - Simme Valley]

And, yes. If you want to get into beef, buy feeders in spring & sell in fall. Not knowing cattle, you don't want to try breeding and calving yet.

 

[kenny thomas]

If your only reason for a farm is that tax break here are some things to ask about. Many of the improvements on the farm are considered as such just improvement and only helps with the capital gains once sold. This includes boundary fences and in some instances Wells and water system. Buildings also.
Another is the cost share which TN offers. I'm pretty sure it considered a taxable income.
Make sure you really understand what is really going to happen.

 

[OleScout]

"And I have a lot of debt that came with my education."
I would put money toward my student loan debt before chasing tax write offs and Gov cost share programs.
What you describe is a hobby farm,16 acre pasture and unknown from the woods.
As said earlier spending $50K out of pocket for a $5 -$10K refund on the tax paid at the day job doesn't add up.
You asked for honest!!

 

[WestTNguy]

"And I have a lot of debt that came with my education."
I would put money toward my student loan debt before chasing tax write offs and Gov cost share programs.
What you describe is a hobby farm,16 acre pasture and unknown from the woods.
As said earlier spending $50K out of pocket for a $5 -$10K refund on the tax paid at the day job doesn't add up.
You asked for honest!!

Ive considered the debt. It will be paid in two years.... if I want to. I'd prefer to not dip into my savings. I've got my interest rate down to 4% and I've always been told if it's 4% or less, just make payments.

What is the divide between a hobby farm and true farm, as far a proving it to the government? The CPA I spoke with said he's "only seen an audit when it's a guy who has 5 goats in his front yard for ten years and never sold or bought any."

And yes I love the honesty. Keep it coming. This is what this post is all about. I'm hard headed. It still makes sense so far....but I am curious about the hobby farm stuff.

 

[snoopdog]

Jan gave you good advice, and you can run more head per acre with good and precise fertilizing, and cross fencing. Do your own research, Personally, I have ran 6 cow / calf pairs,a bull, and 10 feeders on 10 acres,and baled 500 square bales of hay, but it was a very good year, with lots of fertilizer. Anything is possible, but have a plan when it gets dry, be ready to liquidate early.

 

[WestTNguy]

Jan gave you good advice, and you can run more head per acre with good and precise fertilizing, and cross fencing. Do your own research, Personally, I have ran 6 cow / calf pairs,a bull, and 10 feeders on 10 acres,and baled 500 square bales of hay, but it was a very good year, with lots of fertilizer. Anything is possible, but have a plan when it gets dry, be ready to liquidate early.

Noted. That's very impressive. Thank you for the input.

 

[WestTNguy]

I am honestly overwhelmed with the advice and support from everyone. And to the fella who I spoke with from this forum on the phone today....thanks again.

I'd be lying if I said that I didn't have some small bit of desire to do this for my own personal reasons. I vividly remember sitting on the back of my grandads piece of crap truck when I was about 10. We were dirt floor poor. We were talking about having our own ranch in Montana. That's a stretch, but he would be proud of where I am. He was a great man.

Lord, let this work. I mess up a lot and I don't deserve it. Amen.

 

[bbirder]

Make that good money and sock away all you can. Invest wisely. Pay your taxes. What you are describing is not a part time job. When you retire and you still have it in your blood, start you a small herd and grow it. If you are fortunate you will not be broke before you get it out of your blood. There are legitimate deductions but most of them you can't eat!

 

[ccr]

hate to be a naysayer, but don't see paying for working facilities, fences, and other expenses on how this is going to profitable.

for irs deductions don't you have to show a profit after so many years?

if it's the lifestyle your looking for i say go for it.

 

[farmerjan]

Please don't take my comments in a negative way or attitude. I just think that you really do need to understand that no matter how/what you do, and believe me, I have seen alot in 40+ years, farming is not the "way to make money".... especially if you are getting into it. Yes you do have to show some sort of a profit....every so many years. This is where a good accountant/tax person is essential for you if your income is that substantial. I am all for it, but you need to understand the subtleties....
Doing feeders in the spring and selling in the fall is the right way for you to "get into it" as opposed to any type of breeding/calving operation. Still, you are going to HAVE to have minimal working facilities because feeders tend to get sick when taken off cows, sold, moved through a stockyard or facility that hundreds of others have been through and the germs etc. left behind, and then trailered to your place. You are still going to have to spend a considerable amount of money in the infrastructure, and I honestly don't know how much can be written off. AGAIN, knowledgeable tax/accountant person. The feeders are going to require TIME and EFFORT for the first several weeks.
That is why I suggested that if you really want to get this property, and all, get it set up somewhat, and rent it out to someone for a couple of years get a small income from it, not the risk..... Offer to work for them for free, get some experience. Maybe in a year or two, offer to go in halves on the calves in lieu of rent or something. Make sure you can put in the time when it is needed....
Maybe you won't like it....maybe it will fire you up more and then you will have a little more practical experience in it and can honestly do it on your own.

 

[farmerjan]

One other thing I wanted to comment on. You said that at 4% interest, you have been told to just keep making the payments, not pay it off. And that you didn't want to take it out of your savings to pay it off. Not to be nosy, but what is your savings paying you? I have PART of my retirement account money in a guaranteed return account at 2.5% but it is liquid so I can get at it if I need it. The rest is in higher risk, and usually higher return, but at my age, I don't want to carry a big risk because there aren't the years to "come back" if we have another drop like in 2008/2009.... I lost half of my small retirement and when I made it back, I moved a bunch of it to a safer account. A regular savings account is less than 1% ??? If I had debt that was costing me 4% and I was only earning 2%, then I am losing money. I would pay off the debt, then I wouldn't be paying any out and even at a very modest interest, I would be gaining a little. You are looking at "losing money" in a small return account against inflation, but it is still better than paying out a 4% interest rate. You could take money out of your savings, pay off/down on that debt and the money saved from the initial monthly payment could be socked back into the place. Equity ......
I don't think he has all the answers..... But have you ever read anything by Dave Ramsey? He is big on not having any debt, except a mortgage, and then how to invest to be "rich" and there are all kinds of tax shelters to be able to take advantage of. I think that it might be of some benefit to spend a little time studying some of what he "preaches". Not saying you can't still do some of what you want with the farming.... no one said you have to do it all his way or no way. But it sounds like you are fairly disciplined, so ......
Just thought I would throw that out there.

 

[CG1]

I have debated posting this. I have read, prayed, calculated, computed and brainstormed more in the last several months than I believe I ever have.

I decided to post this, because I feel like even with the anticipated criticism, I can still gain some valuable knowledge from you all. I am very impressed with the depth of knowledge in this forum.

I was introduced to farming, and cattle from a young age, but never had the time or money to put into it until recently. I fully believe that if my best friend hadn't asked me to come to college with him so "we could party together" that I would be farming right now. That's just what you did where I come from. From that, I have been fortunate enough to make a pretty be nice good living in the medical field. I ended up dating the right girl who taught me how to study and I ended up where I'm at. I do well, but I am not rich. And I have a lot of debt that came with my education.

Now that my life has finally settled, and I am back home, I have met several neighbors who farm and they reignited the flame to get into it.

After doing some research, and I'm just going to be frank, the tax exemptions from farming almost look too good to be true. I get eaten alive every single year. I've easily paid half a million since finishing school. I have the time to do this, but the knowledge is something I am still working on. I want to lay out my plan, and see what you guys think. I have read every article that I can find on the UT extension website. I have watched hundreds of hours of video. I have spent time on my neighbors farms. I have talked to tax advisors. I have taken the states Master Beef program. I got my BQA certification. But I want unbiased opinions.

I am planning on buying 37 acres. 5 are pasture, 11 are tillable, and 18 are timber. I want to use 2 acres to build a house. I had a guy look and they will be able to harvest some timber for profit. I don't know how much. For the rest, I will buy a dozer and finish to use for pasture. I hope to build some equity. Obviously shelter, fencing, water, etc will be installed at some point also. These will all be wrote off. I hope this is making sense...

In the midst of all this, is where the cattle comes in. My plan is to buy steer calves each year to raise and sell. But really, I have no idea what to do here. My eyes cross thinking about it. My thought was that they would be more manageable for someone with no experience, and still show that I'm actively farming. Again, taxes are my main goal. Any "real" profit generated would just be a cherry on top. If anyone has some insight, I would love to hear it. I've never gone into anything half-assed and I don't intend to start now. This plan of mine makes sense, but I've been wrong before.

Thanks in advance.

I don't know how it works in the USA but in Canada we also get significant tax breaks well farming. It was the main reason why my step father bought my mom and I the ranch 20 years ago. It has saved him significant amounts each year and also gave us a lifestyle we wanted. We have gone on to buy 2 more bcs of the gains we have seen in the land investment alone. We have a total of 20 acres which around here is very large. I have never made money on cattle really. I think I made $5,000 last year on cows. It's really a hobby. But saved by it lowering all of our income and tax due to write offs and tax breaks. We grow marijuana and raise cows, chickens and sheep. Took us 3 building years to get it all going. We saw our first income in the 4th year. Because we are all self employed, we benefit from the government farm rules. If u had a regular 9-5 I don't think it would save us much. I got myself a good accountant that really understood farm regulations. He made the plans.