Rachel RespondsSeptember 21, 2018

Farmland purchase through in-kind payments.

Question:

Can I pay in-kind for my farmland purchase with goods or services?

Answer:

Yes, you can, if the seller agrees. In-kind payments include goods like produce or value-added products, assets like timber, or labor and services. Sine a lender isn't going to want $20,000 to be paid in cheese (as delicious as that sounds), most in-kind scenarios include an agreement that some of the payments be in cash (whether in installments or a lump sum) and others in-kind.

In-kind payments require calculation of the value of the products or services paid. The value assessment for goods might be the going rate at the farmers' market or the grocery store that year. For assets like timber or for services and labor, it could be the state's or region's market rates. The seller/lender and buyer/borrower need to agree on a clear mechanism for calculating this value, and should write that mechanism into the terms of the agreement.

For purpose of taxation, in-kin payments are still payments and tax rules apply. (For example, interest received by the lender is taxable income, even if it's in the form of cheese.). The IRS can choose to calculate the market value of in-kind payments, regardless of the parties' preferred valuation. Tax preparers or local attorneys may be good sources of information if you have tax questions before signing onto an in-kind payment agreement. 

FOR MORE INFORMATION: A sample agreement with in-kind provisions is found in Farm Commons' Financing Your Farm Operation through Personal Loans: A Toolbox for Creating a Promissory Note. Farm Commons' webinar Financing a Farmland Purchase: Legal Basics for Traditional and Nontraditional Farmland Purchases also contacis a discussion of in-kind payments. 

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