Unlike Nebraska, South Dakota does not have a tax credit program. South Dakota does have, however, a bond program to assist beginning farmers known as the South Dakota Beginning Farmer Bond Program (SDBFBP). The SDBFBP is a tax-exempt bond program to assist beginning farmers in South Dakota purchase agricultural property at lower interest rates.
Part 1 will cover the qualifications and eligibility for SDBFBP; Part 2, which is forthcoming, will cover nuances in the program that beginning farmers should be aware of.
What are the qualifications?
- The beginning farmer has a net worth of $400,000 or less;
- The beginning farmer must be at least age 18, unless she or he is married. There is no upper age limit;
- The beginning farmer must be a first-time farmer;
- The beginning farmer must be a resident of South Dakota at the time of the bond is issued;
- The beginning farmer must have documented sufficient training and experience in the type of farming operation for which the bond is requested;
- The SDBFBP may be used to purchase agricultural land, agricultural improvements, and depreciable agricultural property;
- Under federal law, the loan maximums are $501,000 for agricultural land and improvements and $250,000 for new depreciable agricultural property of which no more than $62,500 can be for used property; and
- Agricultural land, agricultural improvements, and depreciable agricultural property shall only be used for farming by the individual, the individual’s spouse, the individual’s minor children, or any of them.
Obviously, there are a lot of words in the above list which may have legal definitions. What are they and what do they mean?
- Agricultural land is land suitable for farming and which is or will be operated as a farm.
- Agricultural improvements are any improvements, buildings, structures, or fixture suitable for use in farming which are located on agricultural land. Under South Dakota law, a single family dwelling/residence located on agricultural land which is or will be occupied by the beginning farmer and structures attached to or incidental to the use of the dwelling (e.g. a garage) are agricultural improvements.
- Beginning farmer is an individual with a low to moderate net worth (here, under $400,000) who engages in farming or ranching or wishes to engage in farming or ranching.
- Depreciable agricultural property is personal property suitable for use in farming for which an income tax deduction for depreciation is allowable in computing federal income tax.
- Farm is a farming enterprise which is recognized in the community as a farm rather than a rural residence.
- Farming is cultivation of land for production of agricultural crops, raising of poultry, production of eggs, production of milk, production of fruit and other horticultural crops, grazing, production of livestock, aquaculture, hydroponics, production of forest products, and other activities as designated.
- First time farmer is a person who has never had any direct or indirect ownership interest in substantial farmland (defined below) in the operation of which he or she has materially participated. An ownership interest or material participation by a person’s spouse or minor child is attributed to the person as well.
- Net worth is total assets minus total liabilities as determined in accordance with generally accepted accounting principles. Assets are valued at fair market value.
- Substantial farmland is any parcel of land unless the parcel is smaller than 30% of the median size of a farm in the county where the parcel is located.
The above is a multitude of words and definitions, but what does it mean in pragmatic terms?
Well, it means that the SDBFBP permits lenders, individuals, partnerships, corporations, and other entities (“Bond Purchasers”) to receive federally tax-exempt interest with respect to a loan or contract sale made to a beginning farmer. Simply, after the Bond Purchaser arranges for a loan or sales contract, the Bond Purchaser will obtain from the South Dakota Value Added Finance Authority a federally tax-exempt Private Activity Bond in the amount of the loan or unpaid balance. The loan and its collateral are assigned to the Bond Purchaser as security for the bond.
A sale to a beginning farmer by a close relative, defined as parents, grandparents, or siblings, is permitted as long as the purchase price paid by the beginning farmer is at fair market value. Further, a sales contract is not permitted; a loan from a third party must be used.
Part 2 will go more in-depth; be on the lookout for it later this week. More information about the SDBFBP can be found here. If you have any questions, please feel free to contact Legal Aid of Nebraska at 855-660-1391.
- SD Agriculture Dept. helps beginning farmers (rapidcityjournal.com)