Today TaxMama hears from Dee in Virginia with a simple question. “I bought some ranch land that is actively producing hay. The mortgage is secured by the land. Can I deduct the mortgage interest from my income taxes?”
You betcha. Yes, you may deduct the mortgage interest. The questions are where to take the deduction, and how much of the deduction may you use.
There are three ways to take the deduction, depending on how involved you are in the operation.
If you are actively running the ranch, you would use Schedule F, Profit or Loss From Farming. That schedule has lines to deduct other routine farming and ranching costs. http://www.irs.gov/pub/irs-pdf/f1040sf.pdf
If you’re simply letting someone run the place and pay you, be sure to check Box E at the top of the page. That will limit the deduction for your losses.
If you are leasing the land out to someone who pays you rent (money), waters the land, and harvests the crop, you need to report the income and expenses on Schedule E.
If you are leasing the land out and they pay you by giving you a share of the crop, use Form 4835.
You’ll want to read more about the implications of farming and ranching. IRS Publication 225 is the Farmers Tax Guide. http://www.irs.gov/publications/p225/index.html
Since your mortgage and property taxes are apt to be more than you are receiving as rent or crop shares, it’s a good idea to learn about the limitations on your deductions. After the big scandals with tax shelters in the 1980s, the Tax Reform Act of 1986 introduced complicated limits. IRS Publication 925 covers the Passive Activity and At Risk Rules which will make you dizzy. http://ftp.irs.gov/publications/p925/index.html
You didn’t think something this simple could be this complicated, did you?
And remember, you can find answers to all kinds of questions about ranching and other tax issues, free. Where? Where else? At TaxMama.com[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]
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- IRS Schedule F :: Profit and Loss from Farming
- IRS Form 4835 :: Profit and Loss from Farming when paid in crop or animal shares
- IRS Publication 225 :: Farmers Tax Guide
- IRS Publication 925 :: Passive Activity and At Risk Rules