Is it time to Hold, Sell or Exchange your Farmland?
Donny Rocha | March 2025
Making Informed Real Estate Investment Decisions. Owning farmland has always been a great way to build wealth, and plenty of agricultural operators have capitalized on that over the years. But one of the toughest calls any landowner faces is deciding whether to hold onto the property, sell it, or exchange it for something new. It’s not just about gut feelings or quick decision, this choice involves weighing a complex mix of financial considerations, operational challenges, evolving regulations, and long-term goals. Making the right move requires a thoughtful, well researched approach.
What’s the Smartest Financial Move?
When it comes to holding, selling, or exchanging farmland, a thorough financial evaluation is non-negotiable. The smartest place to start is by assessing key factors like tax planning, investment strategies, and state specific laws that can impact your bottom line.
Tax Considerations When Selling Agricultural Real Estate. Selling a piece of farmland isn’t just about finding a buyer, it’s about making sure the numbers make sense. Without proper planning, you could end up with a hefty tax bill that slashes your profits. Fortunately, strategies like 1031 exchanges and smart estate planning can help minimize your tax exposure and preserve your hard-earned equity.
Capital Gains Taxes & 1031 Exchanges. Selling your property for a profit sounds great until capital gains taxes take a big bite out of your earnings. A 1031 exchange can help you defer these taxes by rolling the proceeds into another like-kind property, allowing your investment to grow without the immediate tax hit.
Depreciation Recapture. Depreciation can be a useful tool for reducing taxable income while you own the property, but unfortunately it comes back around at sale time with a 25% tax. Long-term landowners can face substantial recapture costs. Planning for this ahead of time can save you from some nasty surprises when you’re ready to cash out.
Estate Planning & State Tax Considerations. Passing your property to the next generation should be a seamless process, not a financial headache. A step-up in basis at the time of inheritance can eliminate capital gains taxes on past appreciation, but state-specific taxes can still throw a wrench in your plans. Make sure you understand your state’s tax landscape to avoid unexpected costs and preserve wealth for future generations.
Making the Right Move. Whether you decide to hold, sell, or exchange your farmland, having a clear financial strategy is key. From leveraging 1031 exchanges to managing depreciation recapture and planning for generational wealth, it all comes down to informed decision-making. Consulting with financial and tax professionals who understand the unique challenges of agribusiness can make a world of difference, setting you up for long-term success and financial security.
Should You Hold or Sell Your Agricultural Property?
Deciding whether to hold or sell farmland isn’t a one-size-fits-all decision, it’s a balancing act between profitability, operational costs, market trends, and the bigger economic picture. Selling your property can free up capital for reinvestment, but holding onto it could mean continued appreciation and steady revenue if the conditions are right. So, how do you make the call? Let’s break it down.
Projecting Future Profitability. You can’t make a smart decision without solid numbers. Developing a pro forma financial statement based on historical data and current market trends is crucial. This process helps you map out the potential and identify red flags. Maybe you’re investing in advanced irrigation systems, automation, or sustainable farming practices. If revenue projections look rocky or flat, it might be time to sell and put that capital to better use.
Market Conditions & Economic Influences. Broader economic factors like interest rates and capitalization rates (cap rates) play a huge role in whether holding or selling makes the most sense. High interest rates can crush buyer demand and lower land values, while cap rates help you figure out the ideal timing for a sale. If you’re seeing interest rates spike and cap rates drop, it might be worth cashing out before the market tightens up even more.
Calculating Investment Returns. How do you know if holding or selling is the better play? Internal rate of return (IRR) analysis gives you a clear, data-driven answer. This metric measures your annualized returns, giving you real insight into whether reinvesting the capital elsewhere makes better financial sense. If the IRR shows better returns from reinvesting, selling might be the way to go. But if your property’s expected to appreciate or keep generating stable income, holding could be the smarter move.
Rising Operational Costs & Market Demand. Let’s be real, operational costs aren’t getting any cheaper. Labor, fuel, regulatory compliance, it all adds up and eats into your profitability. But there’s also the flip side, market demand. Shifting consumer preferences, tech advancements, and export demand all influence your long-term potential. If you’ve got crops that are seeing strong, growing demand, holding onto that land could be your ticket to better returns down the road.
Making the Right Choice. The key here is understanding your revenue potential, costs, and economic trends. And it’s not something you have to figure out on your own. Bringing in experts who understand the nuances of agricultural real estate can help you cut through the noise and make a decision that best suits your financial goals.
Assessing Reinvestment Opportunities
If selling your farmland starts to look like the smart move, the next step is figuring out where to put that capital. The goal? Reinvesting in other alternative asset classes with strong, long-term potential, whether that means diversification, technological upgrades, or even changing regions altogether.
Exploring Diversification Strategies. Diversification isn’t just a buzzword; it’s a smart way to spread your risk. Maybe you’re looking at alternative ag methods, renewable energy, organic farming, specialty crops, or livestock production to reduce exposure to commodity price swings and open up new revenue streams. Consumers are willing to pay a premium for sustainable and locally sourced products, so capitalizing on that trend could be a game changer.
Alternative Assets. Another option worth considering is commercial real estate. It’s a different way to generate income from land, but it’s a powerful one. If you’re an agricultural family selling highly appreciated real estate and looking for steady, long-term income with minimal management headaches, NNN lease properties might be exactly what you need.
Considering Geographic Relocation. Location matters, a lot! Whether it’s growing conditions, availability of inputs, enabling features, such as water resources, infrastructure to market access, certain regions just offer better opportunities. If your current property’s profitability is being dragged down by local conditions, shifting your capital to a more favorable area could boost your long-term returns.
Measuring the Yield for Selling and Reinvesting. Ultimately, comparing the pros and cons of holding versus selling and reinvesting comes down to a couple things, having a steady income stream and acceptable returns. If the potential returns from a new property or investment are better financially and otherwise, it’s worth serious consideration.
Beyond the Bottom Line: Does Your Property Still Align With Your Business Goals?
Let’s be honest, financial returns are a huge piece of the puzzle when it comes to deciding whether to hold, sell, or exchange your farmland. But that’s not the whole story. Nonfinancial factors like business goals, infrastructure, market conditions, and regulatory changes all play a big role in your long-term success.
Market Viability. Is your property still in a prime location? Some areas thrive thanks to strong demand, while others struggle due to economic instability, environmental challenges, or tightening regulations. If the growth potential looks limited, selling and moving on might be the better play.
Water Access. You can’t ignore the impact of water scarcity and evolving regulatory policies. If your property benefits from reliable water access and resilient growing conditions, you’ve got a valuable asset. But if you’re on the wrong side of water regulatory risks, it can seriously hurt your land’s value. Understanding those risks and planning around them is essential to protecting your investment.
Highest Best Use. Is your property being used to its fullest potential? Sometimes, that means reimagining what’s possible. The highest and best use analysis looks at your land from two angles: its raw, undeveloped value and its value with current improvements like trees, irrigation systems, or structures for other alternative businesses. Are those features enhancing value, or are they holding you back from unlocking higher returns?
Is the Property Suitable for Succession? What’s your plan for the future? If passing the property down to the next generation is part of it, you need to make sure your setup actually supports that vision. Outdated infrastructure, high labor demands, and steep reinvestment requirements can become major obstacles, not just for you, but for your heirs. Succession also depends on having willing and capable heirs to take on the operations. The last thing you want is to leave them with a financial burden due to aging infrastructure or costly improvements. If the next generation isn’t in a position to take over successfully, selling and reinvesting elsewhere might be the more practical and sustainable choice.
Risk Tolerance in a Changing Market. Economic volatility, climate change, and evolving consumer demands are all part of the game. But if your risk tolerance has shifted, maybe it’s time to diversify or reallocate capital to minimize potential losses and keep your business on solid ground.
Making a Strategic Move. If your property no longer aligns with your long-term business goals, faces challenges like market instability, water access issues, or outdated infrastructure, it may be time to explore other options. Succession planning is another key factor; without willing and capable heirs to take over, holding onto the property could create more financial strain than opportunity. The key is to take a strategic, well-informed approach to ensure your next move supports both your financial future and overall business objectives.
Alternative Investment Opportunities in Agricultural Real Estate
The ag real estate market is always changing, and if you’re paying attention, that change can work in your favor. Finding higher yields, boosting efficiency, and staying adaptable to industry trends are all part of keeping your portfolio strong.
Nontraditional Revenue Streams. Diversification doesn’t always mean new crops. You can generate passive income through alternative agricultural methods like solar leasing, conservation programs, or carbon sequestration. These options can boost your financial resilience and lessen your dependence on traditional farming operations.
Making the Final Decision: Hold, Sell, or Exchange? Deciding what to do with your farmland is a complex process that goes way beyond financial metrics. Yes, market conditions and investment returns matter, but so do your long-term business goals, regulatory landscapes, and operational challenges. A well-researched, strategic approach will help you move forward confidently and protect your financial future.
Using Data to Drive the Decision. When it’s time to make the call, start with solid financial analysis. Tools like internal rate of return (IRR), capitalization rate assessments, and projected cash flow analysis can provide the clarity you need. Consider broader trends too, commodity prices, regional land appreciation rates, and economic indicators all play a role. A data-driven approach helps you take the “emotions” out of the equation and focus on what’s best for your business.
Considering the Bigger Picture. While short-term profitability is important, you can’t afford to overlook long-term industry trends. Shifts in agricultural demand, advancements in automation, sustainable farming practices, and evolving consumer preferences can all signal whether your current property still fits into your broader strategy. If the market is moving one way and you’re stuck moving the other, it may be time to reposition your assets.
Consulting Industry Experts. Financial analysis gives you a foundation, but it’s not the whole picture. Consulting with industry experts can make a huge difference. Whether it’s real estate advisors, agronomists, tax professionals, or investment experts, their insights can help you build a well-rounded strategy. Agronomists can evaluate soil conditions and crop sustainability, while tax experts can break down the pros and cons of selling versus exchanging. And experienced real estate and financial investment advisors can help you identify alternative opportunities that align with your evolving goals. Getting the right guidance ensures you’re considering all angles before making your move.
Terra West Group Disclaimer:
The information provided in this communication/newsletter is not intended to be investment, tax, or legal advice and should not be relied upon by recipients for such purposes. Terra West Group does not make any representation or warranty regarding the content, and disclaims any responsibility for the information, materials, third-party opinions, and data included in this report. In no event will Terra West Group be liable for any decision made or actions taken by any person or persons relying on the information contained in this report.
About The Author
Donny Rocha is a seasoned agribusiness and finance professional whose knowledge and skills span from financial analysis to real estate, to operations, to sales and marketing. He has 20+ years of proven transactional experience executing real estate transactions and providing financial advisory services. With a foundational background in the farm credit system, commercial corporate banking, real estate, and on-farm experience, Donny brings a wealth of knowledge in agribusiness, real estate, risk management, and financial analytics.