Form 4835 – Farm Rental Income and Expenses (reiterated for farmers and agricultural professionals)

Understanding Form 4835: Farm Rental Income and Expenses

Let’s dive into Form 4835. If you’re a landowner and rent out your farm to someone else to operate, this form is important. It helps you report the income and expenses from that rental activity. But, it also helps determine if that income is considered “passive” or not.

Why Does Form 4835 Exist?

The IRS created Form 4835 to make sure that farm rental income is taxed correctly. It is designed for situations where a landowner isn’t directly involved in the day-to-day farming but still receives rental income. In these cases, it’s important to keep track of all income and associated expenses separately. This form ensures a clear picture of how much profit or loss the rental of your farm land has generated. Before Form 4835, it might have been harder to differentiate between active farming and passive rental income, which could have resulted in miscalculations on your taxes.

How Does Form 4835 Work?

Essentially, Form 4835 is a worksheet where you list all of your income from farm rentals. You’ll also list all of the expenses connected with the rental activity. This includes things like:

• Rental Income: Any money you receive from renting out your farmland or farm buildings. This is the primary source of income on Form 4835.
• Operating Expenses: These can include property taxes, insurance, repairs, and depreciation related to the farm property. Any expenses you incur that directly relate to renting out the farm. For example, if you need to repair a fence specifically because the renter is using the land, those expenses would be documented on Form 4835.
• Depreciation: The reduction in value of any farm property due to wear and tear.
• Other Income and Expenses: Other income from the farm rental business or other deductible expenses, as applicable.

The form will help you calculate the net profit or loss from your farm rental activity.

Material Participation and Its Significance on Form 4835

The crucial part of Form 4835 is understanding the concept of “material participation.”

• Material Participation: This means that you, as the landowner, are actively involved in the farming operation on a regular, continuous, and substantial basis. If you are not materially participating, your rental income is generally considered passive income, as opposed to income from your trade or business.
• Why it Matters: The IRS considers income from material participation as regular business income, subject to self-employment tax and applicable income taxes. Passive income, on the other hand, is subject to less stringent tax rules.

How to Determine if You Materially Participate:

Material participation isn’t defined by just helping out now and then. The IRS has specific tests to determine if you materially participate. You materially participate if you satisfy any of the seven tests below:

1. You participate more than 500 hours.
2. Your participation is substantially all of the participation in the activity by all individuals.
3. You participate for more than 100 hours, and your participation is not less than any other individual’s.
4. You participate in a significant participation activity for more than 100 hours, and the aggregate hours you participate in all significant participation activities exceeds 500 hours.
5. You materially participated in the activity for any 5 of the 10 prior tax years.
6. The activity is a personal service activity, and you materially participated in the activity for any 3 prior tax years.
7. Based on all facts and circumstances, you participated in the activity on a regular, continuous and substantial basis.

If you don’t meet one of these tests, your rental income is usually considered passive. That said, certain rental income can be considered non-passive when the activity has a “trade or business” character. You should consult with a tax professional to determine whether your farm rental activity is a trade or business, and if you are materially participating.

Who Should Use Form 4835?

Here’s a simple breakdown of who needs to file Form 4835:

• Landowners Renting Out Their Farms: If you own farmland and rent it to a tenant who is actually farming the land, you should likely use this form.
• Non-Materially Participating Landowners: As mentioned, if you do not materially participate in the farm’s operation, you will use this form.
• Landowners Who May Have Received Payments from Government Programs: Payments related to government programs for your farm land must be reported on Form 4835 if you do not materially participate.

Related Concepts and Terms

Several tax concepts are closely related to Form 4835:

• Schedule F (Profit or Loss From Farming): If you do actively farm the land, you’ll use Schedule F rather than Form 4835.
• Passive Activity Loss: If your farm rental is passive, your losses might be limited by passive activity rules.
• Self-Employment Tax: If you materially participate, your income is subject to self-employment tax, but not if it’s considered passive.
• Form 1040 (U.S. Individual Income Tax Return): The information from Form 4835 is ultimately transferred to your personal income tax return.
• Form 8582 (Passive Activity Loss Limitations): You will use this form to calculate any passive activity losses resulting from your farm rental activity.

Tips for Filling Out Form 4835

• Keep Detailed Records: Always maintain accurate records of all income and expenses associated with your farm rental.
• Understand Material Participation: Seriously evaluate your involvement in the farming operation to correctly identify if you materially participated.
• Consult a Tax Professional: Given the complexity of farm taxes, seeking help from an agricultural tax advisor can be very beneficial. This is especially true if your situation isn’t clear-cut.

Common Mistakes to Avoid

• Mixing Farm Rental and Active Farming: Ensure you are differentiating between your own active farming income and rental income on your tax return.
• Incorrectly Classifying Participation: Misidentifying yourself as a material participant can cause incorrect tax payments or missed deductions.
• Not Keeping Detailed Records: A lack of records will make filling out Form 4835 very difficult and often will cause you to lose out on deductions.
• Missing Depreciation: Not accounting for the depreciation of assets can increase the taxable income on the farm rental property.

Practical Examples

Let’s illustrate with a couple of examples:

• Scenario 1: Passive Rental. John owns 100 acres of farmland and rents the land to a tenant farmer. John only visits the land occasionally to maintain fencing. John receives $20,000 in rental income, pays $2,000 for property taxes and insurance, and depreciates his farm buildings by $5,000. John reports $13,000 in net income on Form 4835 as passive income.
• Scenario 2: Material Participation. Jane owns 100 acres of farmland and leases the land to a tenant farmer. However, she regularly meets with the tenant to consult on what and how to plant. Jane spends 300 hours a year on this work, making her a material participant. Jane’s income would be reported on Schedule F instead of Form 4835 as trade or business income.

In Conclusion

Form 4835 is a key component of tax planning for farmers who rent out their land. Understanding its purpose and accurately reporting your income and expenses can save you time and money and avoid tax complications. When in doubt, don’t hesitate to seek professional tax advice tailored to your specific farm operation.