Ask Cari: Is Rental Income from a Farm Lease Self-Employment Taxable for Social Security Purposes?

Rincker Law Ask Cari, Food & Ag Law, Landlord-Tenant Law, Property Law Leave a Comment

I was recently posed this question from a farmer close to retirement concerned about social security.  He has been farming his whole life and would like to shift into a landlord role.

In way of background, you must have a certain number of credits under the social security system before receiving social security based eligible quarters.  A farmer may have already obtained this threshold with the Social Security Administration (“SSA”) as he/she nears retirement.  If you have questions regarding your SSA credits, please speak to your accountant.

According to the IRS in the “Farmer’s Tax Guide“, a person is self-employed if they carry on a trade or business (such as farming) in good faith to make a profit.  IRS Pub 225 specifically covers “Landlord Participation in Farming” on Page 74.

As stated in the publication, “income and deductions from rentals and from personal property leased with real estate are not included in determining self-employment earnings.”  However, income from farm rentals will be included if the landlord materially participates in the production or management of agriculture production.  The issue is really whether the rental income is considered active or passive income.

The next question is what entails “material participation” in this context.  In order to “materially participate” in the production of agriculture, the IRS requires the landowner meet one of the following four tests:

(a)  Landowner does three of the following four things:

  1. Pay at least 50% of the direct costs for producing the crop or livestock;
  2. Furnish at least 50% of the tools, equipment and livestock used in the production activities;
  3. Advise/consult the tenant; and or
  4. Inspect the production activities periodically;

(b)  Regularly and frequently takes part in important decision-making and management of the farm affecting the success of the operation;

(c)  Works 100 hours plus directly connected to agricultural production over period of 5 weeks or more;

(d)  Looking at “big picture,” the landowner is materially and significantly involved in the production of farm commodities.

When drafting a farm lease, it is important to keep this passive-active income test in mind if social security is a concern for the landlord.  I suggest that farmers utilize an attorney licensed in their jurisdiction to draft the farm lease memorializing the responsibilities and level of involvement of the parties.

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