When conversation rolls around to the topic of profitable investments, buying a ranch might not be the first thing that pops into your head, but maybe it should. Not only are there the inherent advantages from owning real estate of any kind, but the unique qualities associated with an agricultural property are undeniable. With millions of acres of land for sale in the western United States at any moment in time, we can think of at least four good reasons to invest in this particular financial vehicle.
1. It’s a Safe Place for Your Money
When compared to the daily fluctuations of the financial markets, owning land offers a peace of mind not easily found elsewhere. While real estate markets may suffer the same boom and bust cycles as any other investment, property prices seem to predictably recover and move higher. As long as you don’t get in a hurry to sell, you’re almost guaranteed a profit on a ‘flip’ if that’s your strategy. Unlike stocks, bonds, and precious metals, land has a built-in intrinsic value because the supply is finite. In other words, they won’t be making any more.
2. The Miracle of Leveraging Debt
Savvy investors realize early in the game that real estate is the only investment that allows you to borrow money to buy it. Think of it. You find a ranch for sale for a million dollars and decide it’s the land of your dreams. Once qualified by your lending institution, the most you’ll have to come up with in cash is the down payment. For argument’s sake, let’s say you will be required to put down 20 percent of the total price, which is $200,000. That means you can own and control one million dollars’ worth of land but only need to come up with one-fifth of that amount to do so. All we have to say is don’t try that in the stock market. They’ll laugh you out of the room.
3. Tax Benefits
To investors used to the beating they take from Uncle Sam for playing the stock market, the tax benefits of owning real estate seem mind-boggling.
Depreciation: The IRS, in its wisdom, allows you to depreciate the cost of buying real estate over the course of 27.5 years. That means you can deduct an equal portion of the purchase price each year until it is all accounted for.
No Tax Appreciation: Did you know the IRS does not tax real estate appreciation? Crazy but true. This is why people like Warren Buffett buy and hold forever (or at least a very long time).
1031 Exchange: Under section 1031 of the U.S. tax code, you can sell one property and buy one of equal or greater value without paying any taxes on the transaction. What this means is you can use 100 percent of your profits to buy your next ranch. If that doesn’t seem like a great deal, you should read it again.
The preceding is just a short sampling of a very long list of the ways owning a ranch earns you incredible tax incentives. Why? The IRS has a longstanding policy of encouraging homeownership and doesn’t seem to care much whether you’re in the market for a legitimate residence or just a great investment.
4. Pass on the Value Gratis
One particularly maddening class of taxes are those associated with passing on an estate after death. One way around it is to die and leave the ranch to your heirs. Their cost basis will be the present value of the property and not what you paid for it. They could hold on and watch it continue to appreciate or sell it immediately.
It’s probably no secret that oil and mineral rights have made more than a few multi-millionaires in Texas and, more recently, North Dakota. As technology like fracking grows in efficiency and shrinks in cost, locking down possible mineral rights in perpetuity on large tracts of land is a calculated gamble that has a decent chance of eventually generating future profits. The bottom line is that there are dozens of reasons that buying a ranch makes a lot of sense. Keep in mind that to take full advantage of the tax benefits, you need to make an honest effort to turn a profit on whatever type of operation you intend to run.