What does it mean for a farmer or landowner to diversify from farmland into net lease income? It means moving part of the wealth built up in acreage into ownership interests in leased commercial buildings, where a tenant signs a long-term lease and pays rent on a fixed schedule rather than a schedule set by this year's yield or the futures market. For a producer whose net worth and whose income both ride on the same acres, the same weather, and the same commodity cycle, net lease real estate is a different kind of landlord relationship, one built around a signed lease rather than a planting season. The same concentration problem shows up for doctors, dentists, attorneys, pilots, engineers, tech professionals, and investment bankers, whose wealth is tied up in one practice, one employer, or one piece of equity instead of one farm.
Key Takeaways
- U.S. cropland averaged $6,020 per acre in 2026, the first time national cropland values topped $6,000, while all farm real estate combined averaged $4,500 per acre.
- Farm income is exposed to commodity prices and weather in ways farmland value is not, which is part of why many farm balance sheets are described as land-rich and cash-poor.
- Net lease rental income is generally treated as passive under IRS rules, a different category than the active Schedule F income most farmers already report.
- A Section 1031 exchange can move farmland proceeds into a net lease property because both are real property, but the exchange runs on a strict 45-day and 180-day calendar.
- The net worth test for accredited investor status is often the more practical path for a farmer, since it does not depend on two years of income that can swing with weather and commodity prices.
- Succession is a bigger near-term question for many farm families than for other business owners, since a large share of U.S. farmland is held by producers well into their operating careers.
| Average value per acre (2026) | |
|---|---|
| Cropland | $6.0K |
| Pasture | $2.0K |
| All farm real estate | $4.5K |
Source: USDA NASS, 2026 Land Values Summary.
Why a Farmer's Net Worth and Income Sit in the Same Acres
A farmer's balance sheet and income statement are rarely independent of each other, because the land that produces this year's crop is usually the same land carrying most of the farmer's net worth. When commodity prices fall or a drought cuts yield, farm income can drop in a year when the land underneath the operation keeps climbing in value, which means the two halves of a farm's financial picture do not reliably offset each other the way a diversified portfolio is supposed to.
Land values have kept climbing even through years of volatile commodity prices. The U.S. Department of Agriculture's 2026 land values summary put average cropland at $6,020 per acre, up 3.3% from 2025 and the first time the national cropland average topped $6,000, while pasture averaged $2,000 per acre, up 4.2%. All farm real estate combined, cropland and pasture together, averaged $4,500 per acre, up 3.4% for the year. A producer whose equity keeps rising in the land while the income from working that land stays dependent on weather and futures prices is holding two numbers that measure very different things, and that gap is where the land-rich, cash-poor description of a typical farm balance sheet comes from.
Diversifying part of that net worth into an asset whose income is set by a signed lease rather than a harvest is one way to separate those two halves of the balance sheet, which is the premise behind passive commercial real estate investing generally.
Schedule F, Material Participation, and Why Net Lease Income Is Taxed Differently
Farm income reported on Schedule F is active trade or business income, and most farmers already clear the material participation standard simply by running the operation, which means that status does not transfer to a new, separate investment the way many farmers assume it will. A limited partner interest in a net lease property is evaluated on its own, not on the strength of decades spent actively farming.
The IRS Farmer's Tax Guide, Publication 225, covers the self-employment tax, depreciation, and reporting rules that apply to Schedule F income, including crop insurance proceeds, government payments, and the sale of raised livestock and produce. None of that guidance extends to a rental interest in a separate commercial building, which is governed instead by the passive activity rules in IRS Publication 925.
Publication 925 treats rental activity as passive even where the taxpayer materially participates in it, unless that participation is as a real estate professional, which requires clearing two separate tests measured against all of a taxpayer's personal services for the year, not against the hours spent farming. A farmer who qualifies easily as materially participating in the farm operation under the tests that apply to a trade or business is being measured by an entirely different standard once the asset is a passive net lease interest rather than the farm itself. A passive loss from that interest generally offsets passive income rather than Schedule F income or wages, with unused amounts suspended and carried forward, a limitation covered in the guide to the passive activity loss rules.
Because every one of these determinations depends on a taxpayer's specific filing status, other income, and how the investment is held, the right answer for a given operation is a question for a CPA or tax advisor familiar with both farm taxation and passive activity rules, not a general article.
The 1031 Exchange Path From Farmland Into Net Lease Property
A Section 1031 like-kind exchange can defer tax on a farmland sale by rolling the proceeds into another piece of real property, and since the Tax Cuts and Jobs Act narrowed the exchange to real property only, a net lease retail or industrial building generally qualifies as like-kind to farmland because both are real property held for business or investment use.
The calendar is the part that catches sellers who are used to a farm transaction's slower pace. The IRS's guidance on like-kind exchanges describes a strict sequence: the replacement property has to be identified in writing within 45 days of closing on the farmland, and the exchange has to close within 180 days, with a qualified intermediary holding the proceeds the entire time so the seller never takes control of the cash. A grain contract or a land sale negotiated over a season does not prepare anyone for a clock that runs in calendar days rather than crop seasons.
What a 1031 exchange defers is the gain on the sale, including any depreciation previously claimed on farm buildings, grain storage, or irrigation equipment, which is recaptured rather than forgiven if an exchange is not completed. It does not eliminate the gain and does not remove the tax question. It postpones it, and the replacement property carries the farmland's original basis forward rather than starting fresh. Whether a specific farmland sale and a specific replacement property qualify, and how depreciation recapture on prior farm improvements would be treated, depends on the facts of that sale and belongs with a CPA or tax advisor before any contract is signed.
Leasing Ground to a Neighbor vs. Owning a Net Lease Property
Most farmers already understand landlord economics, because cash rent and crop share leases are two of the oldest contracts in agriculture, and a producer who rents ground to a neighbor has already made decisions about term length, who covers which cost, and what happens if the tenant has a bad year. Net lease commercial real estate runs on the same logic with one structural difference that matters.
In a typical cash rent arrangement, the landowner still pays the property tax on the ground and often carries liability exposure on the land itself, while the tenant pays only for the right to farm it for a season or a year. In net lease commercial real estate, the tenant, not the owner, generally pays the property taxes, the building insurance, and the maintenance on top of the rent. That shift of operating costs to the tenant is the main reason net lease income is described as more hands-off than most farm ground leases, where the landowner is still fielding the tax bill and the insurance renewal every year regardless of who is farming it.
The term is also longer and more fixed. A cash rent lease commonly resets every year or every few years as land values and crop prices move, while a net lease on a retail or industrial building is frequently signed for ten to twenty years with rent increases already written into the contract, trading the annual renegotiation a farm landlord is used to for a longer, less frequently revisited agreement.
Verifying Accredited Investor Status When Wealth Is in Land, Not a Paycheck
Most private real estate offerings are limited to accredited investors, and the SEC's standards offer two separate paths to that status: an income test measured over the two most recent years, or a net worth test measured at a point in time. For a farmer whose Schedule F income swings with weather and commodity prices from one year to the next, the net worth route, built on land value, equipment, and other assets minus liabilities, is often the more stable path to document.
Verification itself works the same way for a farmer as for anyone else: an issuer offering securities under Rule 506(c) has to take reasonable steps to confirm accredited status with documentation rather than a checked box, which can mean asset statements, an appraisal, or a letter from a CPA or attorney rather than two years of tax returns that happen to include a drought year or a year with a large government payment. The mechanics of that process, including which documents satisfy each test, are covered in the guide to how accredited investor verification works.
Worth noting for anyone whose net worth is concentrated in one property: the net worth test excludes the value of a primary residence from the calculation, but it does not exclude farmland, equipment, or other real estate, which means a verification built on land value still has to account for debt secured against that land on the liability side of the ledger.
Succession, an Aging Farm Population, and Why Predictable Income Matters
A large share of U.S. farmland is owned by producers who are well into their farming careers rather than at the start of one, a trend the USDA's own Census of Agriculture has tracked for years. That timeline makes the shape of future income, not just its current size, a planning question rather than a someday question.
A farm operation that depends on one person's labor and one season's weather does not always hand off cleanly to a spouse or an adult child who may not want to run the operation, and farmland that sits idle or is cash-rented at a modest rate can leave an estate with a large, illiquid asset and comparatively little income to show for it. Diversifying part of that net worth into an income stream that does not require anyone to plant, spray, or harvest is one way to separate the question of who farms the ground from the question of where the next generation's income comes from.
None of this requires selling the home place or the whole operation. A partial diversification, funded by a portion of a land sale, a 1031 exchange, or cash built up over several strong years, changes the mix of a family's wealth without changing who owns the farm itself, which is the kind of allocation question covered in the guide to building income that is not tied to one asset or one operation.
Freedom Commercial Real Estate is a Dallas-based commercial real estate firm that publishes investor education for farmers, landowners, and the advisors who work with them, so the mechanics here are understood before a specific piece of ground or a specific offering is ever on the table. Questions about anything covered in this guide, or a topic worth explaining next, can go straight to the team at info@freedomcre.net.
Frequently Asked Questions
Q: Can I use a 1031 exchange to move farmland directly into a net lease property?
A: Generally yes, because both farmland and a net lease commercial building are real property held for business or investment use, which is what Section 1031 requires since the exchange was narrowed to real property only. The exchange still has to meet the 45-day identification window and the 180-day closing window described in IRS guidance, with a qualified intermediary holding the funds throughout. Whether a specific farm parcel and a specific replacement property qualify is a question for a CPA or tax advisor before a contract is signed.
Q: Does farming qualify me as a real estate professional for tax purposes?
A: Not automatically. Material participation in a farm operation is measured under its own trade or business rules, while a passive net lease interest is tested separately under IRS Publication 925, which generally requires more than half of a taxpayer's personal services and more than 750 hours in real property trades or businesses. Hours spent farming do not count toward that real estate test, which is why a passive net lease loss generally cannot offset Schedule F income without meeting that separate standard.
Q: How do I qualify as an accredited investor if my income comes mostly from farming?
A: The net worth test is often the more practical route for a farmer, since it is based on assets minus liabilities at a point in time rather than two years of income that can swing with commodity prices and weather. Farmland, equipment, and other real estate count toward that calculation, though debt secured against those assets is subtracted, and documentation requirements are the same as for any other accredited investor.
Q: Is this concentration issue specific to farmers?
A: No. The same imbalance between net worth and income shows up for business owners whose equity sits in a company, tech employees whose wealth sits in employer stock, and other high earners whose balance sheet is concentrated in one asset or one employer rather than spread across several income sources.
Sources
- USDA National Agricultural Statistics Service, 2026 Land Values Summary
- Internal Revenue Service, Publication 225: Farmer's Tax Guide
- Internal Revenue Service, Like-Kind Exchanges, Real Estate Tax Tips
Have a question about what you just read? Freedom Commercial Real Estate publishes these guides as investor education. Send the team your question, or keep reading below.
Get The Freedom Brief in your inbox
On the 15th of each month: the three guides most worth your time, the month's series, a stewardship reflection, and one sourced number. Education only, never a sales pitch. Unsubscribe any time.
This article is for informational purposes only and is not an offer to sell or a solicitation of an offer to buy any security, nor investment, tax, or legal advice. Any offering is made only through official offering documents to verified accredited investors. Past performance does not guarantee future results.
