The Internal Revenue Service doesn't allow you to use individual retirement accounts for some investments, but real estate is permitted. In other words, an IRA can own farmland. IRA accounts that own real property are self-directed. This means you are responsible for all investment decisions and complying with IRS rules.
Real Estate in IRAs
Brokers, banks and other financial institutions usually don't allow real estate investments in the IRA accounts they offer. To invest in farmland, you'll need to open an IRA account with a provider that doesn't impose these restrictions, commonly called a self-directed IRA. You'll also need to choose a trustee who is familiar with IRA real estate investing because the trustee must take an active role in managing the land. You should work closely with your financial adviser and a real estate agent, especially when choosing the properties you want to invest in.
Farmland and Your IRA
Farmland can help your IRA grow in two ways. As an agricultural enterprise, a farm produces crops ranging from fruits and vegetables to cotton and other raw materials for manufacturing. These crops produce income when sold. In addition, the value of the land may increase, resulting in a capital gain. Before your IRA can buy anything with an IRA, you have to fund it. As of 2013, you can contribute up to $5,500 a year to an IRA, or $6,500 if you are age 50 or older. You can roll over money from another retirement plan to buy a farm. Another option is to buy partial ownership of the property.
Although you make the decisions concerning your self-directed IRA, it's up to the account trustee to handle the actual management of the account and its holdings, including farmland. The trustee makes the purchase and sale of properties and pays property taxes and other bills out of IRA funds. When the IRA receives income from the farm, the trustee reinvests it according to your instructions.
The IRS prohibits certain types of transactions in IRAs and can void the tax-deferred status of the account if you violate these rules. This means all of the assets of the account would become taxable as ordinary income in the year the prohibited action occurred. You cannot make any personal use of the IRA assets, borrow from the account or use it as collateral. You may not transfer or sell property you own to the IRA or buy property from it. In addition, you cannot use any of your non-IRA assets to repair, maintain or otherwise benefit your IRA properties. These restrictions also apply to your family members and to any businesses you own.