You can use your Individual Retirement Account (IRA) to purchase a farm, but look before you leap: Internal Revenue Service prohibitions against self-dealing, i.e., benefiting twice from IRA assets, force you to keep an arm's length from your investment. Before you begin, be sure to choose a reputable self-directed IRA custodian who can help you stay within the law.
Types of IRA Custodians
The IRS requires you to open an IRA with certified custodian. The custodian you choose determines the type of assets you can purchase with your account. For example, most people use their IRAs to invest in securities, such as stocks and mutual funds. These investors choose a brokerage firm to be their IRA custodian. If, however, you want to purchase a farm, you need a self-directed IRA custodian who has experience managing this type of investment.
Buying the Farm
There are two ways to profit from farming in your IRA. The first, and probably the simplest, is to purchase raw land and lease it to a farm. You would pay for any maintenance, upkeep, surveying or legal fees out of your IRA, and the IRA would collect the rent. You could also purchase shares in an operating farm and collect your share of the profits in your IRA. In order for this to work, you could not own a controlling share of the farm or sit on its board.
The options listed above have one thing in common: you would not actually be involved in the farm's day-to-day operations. In fact, it is a violation of the IRS's self-dealing prohibitions to provide a service to the farm or profit from it in any way other than as an investment. You cannot use an IRA to purchase a farm you already own, nor can your IRA sell a farm to you. Additionally, you are barred from doing business with "disqualified persons." These include your parents and grandparents, as well as your children and grandchildren.
Following the Rules
IRA rules are complicated and often not at all intuitive. For example, you are barred from investing in a farm owned by your child, but are allowed to purchase shares in a farm owned by your sibling. Strange rules like these make it important to find a competent professional to act as your self-directed IRA custodian. The consequences for engaging in a prohibited transaction are severe: your account loses its IRA status, in which case it could be fully taxable.