Someone recently thanked me for an article I wrote about how to get farmland out of a corporation. I admit it’s reassuring to hear that people actually read what I write. Later that same day, somebody else called with questions about his family’s corporation and the farmland it owns.
That second conversation stuck with me. The question lingered not only because I hear it frequently in my work with farm families, but also because it hits close to home. My own family has navigated the challenges of farmland held inside a corporation: the logic behind the decision decades ago and the limitations it creates today.
However, the question I’m asked repeatedly is: “Do we have any options to get our land out of the corporation?”
4 options to consider
The short answer is yes. The long answer dives into four options and considers the trade-offs in each:
1. Pull out land now and recognize capital gains. This is the most straightforward option, and often the one families are trying hardest to avoid.
In this scenario, the land is transferred out of the corporation, and the resulting capital gains tax is recognized today. This could occur through liquidation, asset distribution or sale, depending on the structure of the entity.
Before dismissing this option outright, it’s critical to consult with your tax adviser to calculate the tax liability. Too often, families assume the tax will be unbearable without running the numbers.
The good news is that capital gains tax rates are among the lowest they’ve been in history. While no one enjoys writing a tax check, paying a known tax today can sometimes be preferable to indefinitely carrying uncertainty, complexity and risk.
This option prioritizes clarity and flexibility. But it requires a willingness to accept the cost.
2. Split up corporation. Another option is to split the existing corporation into two or more entities, provided you have a legitimate business purpose. See Section 355 of the U.S. Internal Revenue Code for further reference.
This approach can be useful when families want to separate landownership from operating assets, or when ownership groups no longer align in terms of involvement, goals or risk tolerance.
When structured correctly and supported by a valid business reason, a corporate split can create flexibility without triggering the same immediate tax consequences as pulling the land out entirely.
That said, this is not a loophole. The Internal Revenue Service pays close attention to the intent behind corporate divisions. Simply wanting to avoid taxes is not sufficient justification.
This option requires thoughtful planning, documentation and coordination with legal and tax professionals. For the right family, however, it offers an effective middle ground.
3. Create long-term plan to transition land. In some cases, the answer isn’t now but eventually.
Families may decide to keep the land in the corporation for the time being while intentionally planning for a future transition. This could involve aligning estate plans, ownership transitions, redemptions, or generational changes that reduce tax exposure or improve fairness over time.
This option requires patience and discipline. It also demands clear communication, so future generations understand the plan and their role in it. This is the plan I wrote about that receives the most attention.
Without intentional planning, later has a way of turning into never.
4. Do nothing and accept original intent. This may be an unpopular opinion, but it deserves to be included. Sometimes, farmland was placed into a corporation on purpose: to protect it, to keep it intact and to make it harder for future generations to sell.
If the land is still fulfilling that purpose — supporting the operation, staying in the family and aligning with shared values — then doing nothing may be a valid choice.
The real problem isn’t the structure itself. The challenge arises when families inherit a structure without understanding why it exists or what they actually own.
How to choose right option
Every option involves trade-offs between taxes, control, flexibility and family dynamics. The key is stepping back and asking better questions:
- What problem are we trying to solve?
- What is the cost of action? Inaction?
- Are we reacting to frustration or planning with intention?
Today’s challenge is often the result of yesterday’s solution. The goal isn’t to undo the past. The goal is to make thoughtful decisions for the future. And sometimes, the most important step is simply understanding the options.
Downey has been consulting with farmers, landowners and their advisers for nearly 25 years. He is a farm business coach and manager of succession planning at UnCommon Farms. Email mdowney@uncommonfarms.com.