Indiana Farmland Lease
Law
Gerald A. Harrison
Extension Economist
1145 Krannert
Purdue University
West Lafayette, IN 47907
Phone: 765-494-4216
Toll free: 1-888-398-4636
E-mail: harrisog@purdue.edu
References
• Indiana Farmland Lease Law, EC-713, in print and under
“Legal Affairs”online at:
http://www.ces.purdue.edu/extmedia/agecon.htm
• Purdue Ag Econ Report, a quarterly, online at:
www.agecon.purdue.edu/extension/pubs/paer/
• Indiana Code online at:
http://www.state.in.us/legislative/ic/code/
• Ag Law: Emphasis Indiana—AgEc 455
http://www.agecon.purdue.edu/academic/agec455/
Look for “Papers and Publ.” and “Lecture Notes”
and Farmers Tax Guide, 2004 at:
http://www.irs.gov/app/scripts/retriever.jsp
See Material Participation, on page 79,
Quiz -- True or False
• 1. Oral leases are not legal and need no notice to
terminate.
• 2. Material participation is a status of a
landlord to be which is required to pay the SelfEmployment tax (15.3%)
• 3. In Indiana, the “landlord’s lien” may be
ignored if his or her tenant is in bankruptcy.
• 4. A term lease in Indiana requires a three month
notice in advance of the lease-year’s end.
• 5. In the Midwest, “custom of the community”
for the lease-year end is December 31.
Essay/“Short Answer”
• Yesterday, a landlord calls and says “ I read that
Benton County rented some farmland for 2004
at an auction for over $140, and I am only
getting $120 since 1996.”
• “Can you help me?” Oh , and “big farmer” gets
the grain bins with dryers and electricity
provided.
• (Two typed pages, max., no bloviating, and do
not repeat the question.)
• A. What might a lawyer say?
• B. How can a farm manager help?
Leases longer than three years?
2002 amendment.
• IC 32-31-2 --- If a lease for a period
longer than three (3) years is not recorded
(In the Miscellaneous Record) within fortyfive (45) days after its execution,
• the lease is void against any subsequent
purchaser, lessee, or mortgagee who
acquires the real estate in good faith and
for valuable consideration. –
Tax Law Requires a Written Lease
• Federal tax : Reg. Sec.1.1301-1
• Averaging of farm income requires a landowner
who otherwise qualifies to use income averaging
as a share-lease landlord to have a written lease
starting Jan. 1, 2003.
• This regulation says there is a bar to income
averaging without a written agreement even if
the landowner is materially participating.
• One more reason to have a written lease.
Indiana Farmland Lease Law
• A lease or rental arrangement is a contract that
conveys and interest in real estate– a “stick in the
bundle” of rights.
• Oral leases for Indiana farming are “valid!”
– Written leases are a great idea, and good business
practice, and common place for most acreages.
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Indiana has a “three month” notice statute.
Term leases are for a set (stated) time period.
Term leases require no notice to quit!
Landowner (landlord) involvement in the farm
operation matters for federal income, estate, and
“social security tax” purposes.
Timing of Notice to Quit
• When is the last day of the lease year?
• By “custom,” a year- to-year lease of farmland is
presumed to begin on March 1 and end on the last
day of February.
• When applicable, a 3-month notice must be
given on or before first day of December.
• If there is “convincing evidence” that the lease
actually began on some other date, the actual term
and its last day are used.
• Tip: Get it in writing and include in the lease details
about how and when the lease may terminate.
Delivery of a Notice
• Notice may be served by delivering a written
copy to the tenant—in person.
• By sending a copy of the notice to the tenant
by certified or registered mail, with a
returned receipt from the addressee.
• If no one is “actually in possession” of the
premises,a notice can be posted on the
premises—so says the law, but…..
• A sheriff’s delivery with return receipt is the
best notice, especially in “difficult” situations.
Doctrine of Emblements
• Issue is rights to growing crops when a lease
ends --away-going crops
• Basic rule -- a tenant has a right to a crop that
will mature after the end of the lease.
• --- It is an exception to the a rule that crops go
with the real estate.
• Arguably, the doctrine of emblements applies to
expense incurred for a following year’s crops if
incurred before a lease termination.
• --- where termination is not for waste or other
failures of good husbandry.
Sale of the Land or Death of the
Landlord
• Sale of the land: -- generally, without other
stipulations, the tenant has the same rights, &
lease, with a new owner(s) as with the prior
owner(s).
• Death of the Landlord: Ditto above.
• The existence of a written is not an issue.
Securing the Payment of Rent/
Retaking the Premises
• Failure to pay rent:
• -- A tenant should insist on a grace period for failure
to pay rent.
• -- Indiana statute, after 10 day notice a landlord may
oust a tenant who fails to pay rent when due.
• -- Landlord’s lien for rent (IC 32-7-1-18a)
• --- it is a statutory, non-consensual lien
•
-- not “automatic” in Indiana.
• ---- must file 30 days before the crop matures!
• -- UCC, Art. 9, security interest is better! So is
• -- a letter of credit, or a subordination agreement.
Buyer Notice System in Indiana
• Since the early 1980’s
• Requires the debtor to list potential buyers
for a creditor, if requested.
• Creditor has the responsibility of giving
notice of a UCC security interest in a farm
commodity to the potential buyer!
• Notified buyer “must” issue a joint check
to all those who gave notice along with the
debtor-seller.
Special Use Valuation
- IRC Section 2032A Cash Rent - “Land tax”
= “Ag Use Value”*
“FLB” Interest Rate**
Special valuation notes:
* Both numerator and denominator are five-year averages for the five
years before the year of a decedent’s death, and
“Cash rent minus real estate tax” is for “comparable soils in the
community.”
** Published annually in an IRS Revenue Ruling by Farm Credit Bank
Districts – the St. Paul Bank has included Indiana.
The five-year average interest rate for decedents in Indiana has dropped
from 9.3% for 1995 to 7.36% for 2003 and 6.93% for 2004 estates.
Material Participation (MP)
• MP is critical for saving federal estate tax.
• MP is required for special use valuation (SUV) of
land for federal estate tax purpose, and MP is a
requirement for the Family Owned Business Interest
Deduction.
• SUV allows up to $850,000 in a farmland value to
be removed from a decedent’s estate tax estate
owner’s estate.
• FOBID (repealed for decedents after 2003)
permits up to $675,000 of closely-held business
assets to be deducted from a decedent’s gross estate.
Material Participation (MP)
• -- However, a single family member may satisfy the
MP requirement for special use valuation as well as
the Family owned business interest deduction.
• Social security retirement or disability suspends the MP
requirement.
• Qualified heirs need only have one of their family
members materially participating for maintaining
eligibility for the tax savings from SUV and FOBID.
• Cash rent is permitted by the landowner and the
qualified heirs as long as it is rented to a family
member who is a lineal descendant of the landowner.
Tax Rules for Social Security and
Estate Planning Material Participation
• -- MP is the level of involvement in the lease
• -- so the landlord is “earning” income and
“qualified” to pay self-employment tax (SE tax)
on the Schedule F income (“farmer” IRS form),
and be allowed (required) to pay SE tax.
• -- establish credit for Social Security benefits
• -- note, an operating farmer, does not need the MP
concept since he or she is actively involved as sort
of an “independent contractor,”
Material Participation (MP)
• There are several ways to meet the MP test
• -- See them in the IRS Publ.#225 Farmer’s Tax
Guide, 2004, Page 79
• -- In mid-west, farmland-leasing situations, the
MP requirement may, with a share lease-landlord who supplies a share of the cost of
inputs, for a share of the crop, and has authority
in the production decisions throughout the year—
and “looks over the operation” periodically. –
I.e., “exercises his or her landlord’s authority.”
• Note, a share lease places the landlord at risk!
Material Participation (MP)
• -- -- As point of history, an agent(manager) could
stand between the landlord, and the tenant and
the landowner could “materially participate,” i.e.,
and earn social security benefits. Why not?
• May a “farm manager” (agent) satisfy MP
requirements for a landowner, today? No!
• Not since 1974.
• Congress simply changed the rule in 1974.
Material Participation (MP)
There is more to the saga.
• -- To MP in the earning of farm income (or any other
type of income) that income is “active” income for
Soc. Sec. retirement purposes as well as for SE tax.
• Before Jan. 2000 such earnings could cause a loss of
part of a Soc. Sec. retiree’s benefit until age 70.
• Now, that is only true for SS retirees before age 65.
Material Participation (MP)
• Does MP requirement create a dilemma, or a point
of ignorance?
• Many think (or thought)at SS retirement, a
farmer/landowner must switch to cash rent so:
• a. they can stop paying SE tax, and
• b. not have active income from their rental that may
be sufficient in amount to cause a loss of part of
their SS retirement income. Is (was) there a middle
ground?
Material Participation (MP)
• A landowner may share lease and not be materially
participating. (If not, why an MP test?)
• When a share landlord wishes not to MP (i. e., retire
from farming activity either as operators or as MP
landlords),
• they file their share of farm proceeds on a Form 4835
rather than a Schedule F – that “certifies” they are not
materially participating in their share lease.