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If I make an investment in a private farm project, let's say livestock farming, how should I record the income?

Let's say most of the livestock on the farm are sold after a few months, generating a "profit". If I choose to take the profit but allow the principal to roll over, then is this a simple capital gain for Schedule D? If I instead choose to allow the entire investment to roll over, then was any gain realized at this point?

Extra detail:

  • I do not operate a farm.
  • I am not a partner in any business.
  • The farm is not incorporated.
  • A contract is signed, laying out the terms of the investment.
  • The investment is at risk, and no interest rates involved.

2 Answers 2

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I am not a partner in any business.

Yes, you are.

Unincorporated business with multiple parties is a partnership. The partnership (the farm) will file form 1065 and will furnish you the form K-1 for your share of profits, losses, expenses, and equity.

You'll use the data reported on your K-1 to fill your own tax return.

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  • Interesting. Part of that might be accurate. In this case I don't expect a K-1. Probably need to get an accountant. Commented Jun 19 at 20:53
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    @RobertChapin you don't expect... why? Yes, accountant would be a good idea, farming is not trivial, accounting-wise, and probably is beyond the scope of this forum.
    – littleadv
    Commented Jun 19 at 21:34
  • @littleadv IRS Schedule F would be in scope of the forum, but the OP framed their question such that it doesn't apply to them.
    – user662852
    Commented Jun 19 at 22:20
  • I am just an investor for a short term on a small project. I have no involvement with the operation of the farm nor the accounting, and I don't think the farmer has any plans to draw up partnership returns. I'm just figuring out how the income is treated on my end. Commented Jun 19 at 22:26
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    The other way to deal with this is to make the investment a loan rather than a share of the business. Commented Jun 20 at 2:37
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If you start with the 1040 form https://www.irs.gov/pub/irs-pdf/f1040.pdf you are supposed to report all income. Period. If you won $5 betting on a baseball game with your buddy, you technically are supposed to report that somewhere. Held a garage sale? You ought to figure out if you sold anything at a profit and if so, report that. Found a $20 in the ground? Technically that's income, too. And so. If you have a buck this year that you didn't have last year, somewhere it is income and should be reported on some line item on the 1040. Now, some of that income can be offset -- i.e. if you won $5 on a bet with your buddy, but you also bought $5 of scratchers and didn't win anything, those gambling losses from the scratchers can offset that win. But, yeah, that will also need to be documented on to another line item on a form.

So you look at 1040 and see a line item 8 'additional income' and then redirects you to Schedule 10 https://www.irs.gov/pub/irs-pdf/f1040s1.pdf

And then line 6 on Schedule 10 is 'farm income' and redirects you to Schedule F

https://www.irs.gov/pub/irs-pdf/f1040sf.pdf Which, this looks like a real beast of a form to me (rando non-farm having person on the internet). But I also note that there is questions at the top about how much you 'materially participated' in the operation of the farm. And then what accounting method the farm has chosen. And just a whole bunch of things that since you are a part of a farm, that you are going to need to answer.

So, yeah, if your farm here isn't going to incorporate or form a partnership formally, well, looks like the IRS still has you covered in terms of things you need to tell them about.

I'd probably we willing to pay a tax professional at this point to discuss what is likely the easiest and possibly most-tax-advantaged way for all of you to set this up.

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