Farmland is becoming an increasingly popular means of investment, particularly among investors seeking to develop farmland for residential or commercial use. While farmland transactions can be similar to garden-variety residential transactions, a client seeking to purchase farmland for investment may encounter numerous issues particular to farmland transactions. Farmland issues, such as liability for federal estate taxes and conservation easements limiting the possibility of residential development, are significant to potential investors. This article outlines various issues relating directly to the transfer of farmland with an emphasis on issues important to investors seeking to develop the land for residential use.

Section 2032A Liens

Whether a Section 2032A lien is attached to given property is an important consideration for all purchasers of farmland as the Internal Revenue Code provides for potentially large tax liability if certain property ceases to be used as farmland. Essentially, the Internal Revenue Service (IRS) allows for substantial reductions in estate taxes for family farms that are used for farming. However, under certain circumstances, the IRS may recapture these taxes - particularly if the property is conveyed to a non-farmer. For the purposes of this possible recapture, the relevant statutes of the Internal Revenue Code (codified at Title 26 of the United States Code) are outlined below.

Section 2001

Section 2001 provides for a tax "on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States." The Section also provides for a general rate schedule for these taxes, correlated with the actual value of the estate. The significance of this to potential investors in farmland is this section's relationship with Section 2032A.

Section 2032A

For the purposes of the Tax Code, Section 2032A provides that the valuation of certain qualified farmland property shall be calculated as "the value for the use under which it qualifies," if the executor of the estate so elects. In conjunction with Section 2001, the practical effect of this is to create a reduction in estate tax with respect to the transfer of farmland, as the estate tax will be assessed not by the general valuation method, but by the special valuation method for farms. This method of special valuation also applies to standing timber on qualified woodlands.

The IRS may, however, recapture the difference in tax owed using the two different valuations under certain circumstances, as authorized by Section 2032A(c). If the property ceases to be used for farming purposes by the decedent's heirs within ten years of the decedent's death, or if the heir disposes of the property (to someone not a member of his or her family), the additional tax that would have originally been assessed against the property will be recaptured by the IRS.

The IRS has two methods to recapture the difference. Section 2032A(c)(E)(5) provides that the heir shall be personally liable for the unpaid taxes. More important for real estate investors, however, is Section 6324B, which provides as follows:

[i]n the case of any interest in qualified real property (within the meaning of Section 2032A(b)), an amount equal to the adjusted tax difference attributable to such interest (within the meaning of section 2032(c)(2)(B)) shall be a lien in favor of the United States on the property in which such interest exists (emphasis added).

Because this special lien is placed on the property itself, real estate developers and purchasers are advised to demand that a seller-heir pay off any amount due to the IRS as a result of violating a 2032A valuation agreementbeforethe transfer takes place. This will help to ensure that the title obtained by the purchaser is as free from defects as possible.

Farmland Conservation Acts


Another potential source of title difficulty for the farmland purchaser/developer arises out of the Illinois Agricultural Areas Conservation and Protection Act, codified at 505 ILCS 5/1et seq.The Act's purpose, according to Section 5/13 of the Act, is "to provide a means by which agricultural land may be protected and enhanced as a viable segment of the State's economy and as an economic and environmental resource of major importance." The most relevant details for investors are outlined in the following paragraphs.

The Act provides that a farmer may register his or her farmlands with the local county board as a protected district, commonly referred to as an "ag area." 505 ILCS 5/5. The county board makes determinations about whether a given area should receive the designation, based upon such considerations as the viability of active farming within the area, the presence of viable farmland, and the nature and extent of other land uses within the proposed and adjacent areas. 505 ILCS 5/6. A minimum of 350 acres is required for the land to receive such designation. 505 ILCS 5/5. When land becomes part of an ag area, it is registered as such for at least ten years, at which point owners can request that the land cease to be designated as such. 505 ILCS 5/17. The most significant consequence of the ag area designation is to effectively preclude non-agricultural development on the relevant property.

As such, it is prudent for all prospective farmland developers to ask if the farmland has been registered under the Act. Interestingly, it has been suggested that personal and sentimental reasons, rather than practical ones, are often a major part of the rationale for a farmer declaring land an ag area. In which case, if a farmer is willing to sell land to investors or developers, it is likely the farmer has not sought this distinction. Regardless, consider this if the land is registered as an ag area -the ag area designation does not change with changes in ownership of the land.

The first and probably best option for the potential purchaser is to go straight to the source. Landowners may request that land be dissolved from the ag area while the ten-year period is in effect under Section 5/13 of the Act. This request must be made to the local county board, which has the final say with respect to any possible changes in an ag area. The withdrawal application must include a statement of the proposed alternative use of the land, an explanation of the necessity for changing the current use, and an explanation why land outside the agricultural area would not be suitable for the proposed use. 505 ILCS 5/12. While statistics are not available for how often these applications are granted, it would appear that, given the standards that the statute sets out for a withdrawal, particularly the third, proposing that an ag area be allowed for residential development would likely be a thorny proposition. In making its decision, the county board will consider the review and comment of the regional and county planning commissions. This could result in problems for developers if the proposed purchase conflicts with current plans.

Additionally, the ag area designation is automatically extinguished if the ag area tract originally submitted dwindles to less than 350 acres. 505 ILCS 5/15. Therefore, it is well worth the prospective purchaser's while to examine the tract's size and determine if there are any potential reasons the ag area could be reduced to less than 350 acres. However, as noted above, simply buying out the property, or splitting the property ownership into smaller units, will not change the ag area status.

Potential real estate investors should avoid ag areas entirely if possible due to potential delays in converting parcels into residential land. However, any purchaser seriously considering the purchase of land designated as an ag area would be well advised to have the current owner submit an application for withdrawal of land from the ag area, under Section 5/12, before the property is conveyed. Otherwise, the purchaser may be stuck with property that is not developable. It may also be worthwhile for the prospective purchaser to determine how much time is left in the ten-year period. If the purchaser's plans do not involve immediate construction, the remainder of the ten-year period might be tolerable.


While Indiana does not have a statute that provides for the registry and protection of agricultural areas, Indiana law does create "conservation districts," some of which have endorsed farmland conservation. Crawford County Soil and Conservation District, "1997 District Program Plan" (http://www.cccn.net/Organizations/ccswcd/www/dpp.html) (14 June 2004). As a practical matter, however, these conservation districts have no power to legislate and will not pose a problem for investors seeking to develop farmland.


Wisconsin's Farmland Preservation Act, codified at Wis Stat § 91.01et seq., combines some elements of an ordinary farmland conservation program with tax benefits. If a farmer's land is in an exclusive agricultural zone or if a participant farmer agrees not to develop land during an agreement period, the farmer receives substantial tax credits and avoids other taxes that would normally be assessed on the property. However, if the agreement is violated, per Section 91.21, a farmer or successor in title to the land may be enjoined and is subject to a civil penalty for actual damages. As with the Illinois statute, changes in ownership of the land will not terminate the agreement.

If the farmland lies in an exclusively agricultural zone, investors would do well to steer clear entirely. If, on the other hand, the farmer has agreed not to develop the land, the potential investor should determine when the agreement expires. A farmer can also request that the land be removed from a preservation agreement after ten years of coverage. Wis Stat § 91.19(6t). Otherwise, extremely stringent requirements must be met for the relinquishment of an agreement, making removing the property from the agreement an arduous if not impossible task. Section 91.19(2)(c)(1)(d) of the Act flatly requires that "the proposed development is not for residential use" for a relinquishment of a preservation agreementinter alia.

Conservation Easements

As pro-agriculture activists have become increasingly frustrated with current implementations to protect farmland, a number of counties in Illinois and Wisconsin (including Illinois' Kane) have put into place "purchase of development rights" (PDR) easement programs. The text of Kane County's Ordinance No. 01-67, establishing the County's easement program, is available athttp://www.farmlandinfo.org/documents/28354/IL_Kane_PaceOrd.PDF. A county's authority to put a PDR program into place stems primarily from 55 ILCS 5/5-1005 (granting a county the power to purchase real estate for open space purposes) and 55 ILCS 5/5-15009 (granting a county the power to protect the water supply).

Typically, the core function of a county-operated PDR program is to use state funds to acquire rights in given farmland - and permanently put to rest the possibility of non-agricultural development. In return for keeping their lands permanently available for agricultural use, farmers who participate in this program receive the difference between the value of the land as farmland and what they would have received had they sold the land to residential developers. While it is fairly unlikely that farmers who participate in such programs are the same farmers who would sell their farm to residential developers, prospective purchasers of land must be certain to inquire whether any conservation easement exists on the land. If the land is burdened with this sort of county-based conservation easement, there appears to be very little the purchaser can do with the land, as the easement will typically be enforced in perpetuity with respect to future owners of the property.


In 1984, Indiana adopted the Uniform Conservation Easement Act, codified at IC 32-23-5-1 et seq. The Act allows local government units and nonprofit organizations to purchase conservation easements from local farmers to ensure that the land is used for limited purposes and that development on the land will be limited. IC 32-23-5-2. In substance, easements created by this Act are fundamentally similar to the ones described above, issued at the county level. For the purposes of the prospective purchasers, there is a good probability that the easement was granted in perpetuity, as the Act provides this result as a default. IC 32-23-5-5(c). However, in case the current owner represents that an easement was granted for a certain number of years, it would be prudent for the prospective purchaser to examine the deed of easement to verify this. As is the theme with most conservation-minded agricultural programs, the easement will "run with the land" and is not extinguished by change of ownership. IC 32-23-5-7(2).


Wisconsin was the first state to adopt the Uniform Conservation Easement Act, codified at Wis Stat § 700.40. See the discussion of the UCEA for Indiana,supra.


Because of their special role in providing a habitat for many species and their broader ecological role as natural drainage and filtering systems, many states and the federal government have provided for the protection of wetlands. For example, the Federal Clean Water Act was passed to "to restore and maintain the chemical, physical, and biological integrity of the Nation's waters." 33 USC § 1251(a). In the context of the Federal Clean Water Act, wetlands have been defined as "those areas that are inundated or saturated by surface or ground water at a frequency and duration sufficient to support, and that under normal circumstances do support, a prevalence of vegetation typically adapted for life in saturated soil conditions." 33 CFR § 328.3(b). Very similar definitions are in place at the state level. See, e.g., Wis Stat § 23.32(1).

Federal Protection

In a recent decision that reshaped the universe of wetland regulation, the United States Supreme Court determined that isolated wetlands are not protected under the Federal Clean Water Act.Solid Waste Agency of Northern Cook County v US Army Corps of Engineers, 121 S Ct 675, 531 US 159, 148 L Ed 2d 576 (2001) (SWANCC). For the purposes of this decision, an "isolated" wetland means a wetland that is not adjacent to navigable waters or tributaries. The Sierra Club estimates that this decision removed about 60% of Illinois wetlands from federal regulation. Sierra Club, Illinois Chapter,Illinois Sierra Club Home Page, "Protect Illinois Wetlands" (http://www.illinois.sierraclub.org/legislation/hb913.pdf) (4 June 2004). Similar estimates have been made for both Indiana and Wisconsin. Therefore, as of now, because neither Illinois legislation (seeinfra) nor federal legislation regulates these isolated wetlands, Illinois real estate purchasers and developers will not likely face many legal obstacles if they choose to develop such isolated areas. As such, those considering investing in wetlands areas would be well-advised to select wetlands that are not in any way connected or adjacent to navigable waters or tributaries.

On the other hand, all developers of non-isolated wetlands are still subject to the federal Clean Water Act, which requires permits from the Army Corp of Engineers for the discharge of fill material into wetlands areas. 33 USCA § 1344(a). The definition of "discharge of fill material" includes, inter alia, as follows:

[p]lacement of fill that is necessary to the construction of any structure in a water of the United States; the building of any structure or impoundment requiring rock, sand, dirt, or other material for its construction; site-development fills for recreational, industrial, commercial, residential, and other uses. 33 CFR § 323.2(l).

For investors, the significance of this language is that it strongly suggests that conversion of such land into residential areas would require a permit from the Army Corp of Engineers. SeeKelly v US EPA, 203 F 3d 519 (7th Cir 2000), for an illustration of a landowner who avoided obtaining the permit and then suffered administrative fines for placing fill material into a wetland. There are two additional points also of interest to prospective investors: (a) strict liability applies to violations of the Clean Water Act; and (b) lack of environmental damage caused by the filling does not preclude liability.Id.

The soundest path for an owner of farmland who wishes to develop non-isolated wetlands is to obtain a permit. This does not usually tend to be an overly difficult process as, at least in fiscal year 1994, over 99% of permit requests were granted.Id. Additionally, the fact that the EPA may impose civil penalties of up to $25,000 per day per violation provides another compelling reason for seeking the permit. 33 USC § 1319(d).

State Protection


The one and only Illinois state-level wetlands Act in place is the Interagency Wetlands Policy Act of 1989, 20 ILCS 830/1-1et seq., which regulatesonlystate-funded and state-sponsored activities involving wetlands. Thus, this is not of great interest to most prospective purchasers. Otherwise, purchasers of wetland-containing farmland have little to no obligation at the Illinois state level. Their sole concern is with the Federal Clean Water Act. However, as the lack of protection for Illinois wetlands has been a very controversial issue, purchasers of such wetlands would be wise to keep track of new legislation (including current HB 913) that could potentially affect their ability to develop these lands for residential use.


In response to the controversial SWANCC decision, the Indiana Department of Environmental Management promulgated new administrative rules to protect those wetlands that the SWANCC decision removed from federal protection. InIndiana Dept of Environmental Management v Twin Eagle, 798 NE2d 839 (Ind 2003), the Indiana Supreme Court held that the Department's practice of requiring permits for the dredging and filling of these isolated wetlands was legal. For investors, this means that, in Indiana, both the Clean Water Act and the Indiana Administrative Code must be complied with. To comply with Indiana law, anyone dredging or fillinganywetland must have a permit. 327 IAC 5-2-2.


Wisconsin's response to the SWANCC decision was more explicit and more legislative in nature: the Wisconsin legislature passed Wisconsin Act 6 in 2001, creating Wis Stat § 281.36, which gave the state jurisdiction over all wetlands, including the "isolated" wetlands that lost protection as a result of the SWANCC decision. The Wisconsin act essentially brought back to life the same procedures for dredging and filling a wetland that were in place in Wisconsin before the SWANCC decision. Thus, investors who purchase farmland must apply for a permit with the Wisconsin Department of Natural Resources before dredging and filling even an "isolated" wetland in Wisconsin.


As urban expansion continues to extend over farmland, the new owner of farmland will frequently find drainage tile buried underneath the surface. Drainage tile is underground pipe of various widths that is often placed in flat farm fields to aid in the removal of excess water from the crop field and into the nearest ditch or river. Drainage tile is essential for many farmers to keep their crops from being drowned or otherwise damaged by water. Drainage tile that serves a farm benefited by the tile may become an obstacle for prospective purchasers seeking to convert farmland to residential land if an adjacent farmer has an easement for the drain.

The traditional common law rule for such drainage easements is as follows: "[w]here water from one tract of land falls naturally upon the land of another, the owner of the lower land must suffer the water to be discharged upon his land and has no right to stop or impede the natural flow of the surface water."Bodenschatz v Parrott, 153 Ill App 3d 1008, 506 NE2d 617, 106 Ill Dec 817 (5th D 1987). The Illinois Drainage Code provides a more far-reaching rule:

When it is necessary for the owner of land which may be drained by a covered drain to extend such drain through the land of others in the general course of natural drainage in order to obtain a proper outlet and the owner of, or other party interested in, the land through which such extension is necessary refuses to consent to the extension of the drain through his land, the person desiring to construct the drain may file suit in the circuit court in the county in which such land lies against the owner or other party so refusing, and summons shall issue in the same form and shall be returnable in the same manner as other summons in civil actions, and proceedings shall be had thereon as in other civil actions in circuit courts. 70 ILCS 605/2-2.

In the litigation that follows, the benefited owner is entitled to win if the following holds true:

… it is found that the proposed drain will be of ample capacity, will not materially damage the land of the defendant and will empty into (a) a natural watercourse, (b) an artificial drain along a public highway, with the consent of the highway authorities, or (c) any other outlet which the plaintiff has the right to use. 70 ILCS 605/2-5.

Drainage easements can be created by prescription, oral agreement, or by a written easement. The Drainage Code provides that underground drainage systems constitute an easement in favor of the property drained by the drainage system even if no written document creates the license or easement in favor of the drained property. 70 ILCS 605/2-8. Either an oral agreement or the fact that a drainage system has been laid in the ground is sufficient to create an enforceable easement in favor of the drained land. Additionally, the easement continues into perpetuity, the owner of the drained land has the right to repair the easement, and the right to penalties if the owner of the servient land interferes with the drainage system. 70 ILCS 605/2-10 to 2-12.

Prospective purchasers would do well, therefore, to examine the property closely for any evidence of such an easement; it may also be worthwhile to communicate with the current owner and owners of adjacent property to determine whether any easement relationship exists between the properties. If the farm happens to be part of an incorporated municipality, it would be worth investigating to determine if the municipality provides for the drainage of the adjacent farm - in which case, the adjacent farm could take advantage of the municipality-provided drainage and thereby no longer require an easement. However, since many farms are located in unincorporated areas, few alternatives to negotiation appear to exist in most situations if an adjacent farmer has such an easement.


While Indiana does not have a statute specifically granting easement through adjacent tracts, of interest to all homeowners is that Indiana's Drainage Code does provide for a seventy-five foot "right of entry" easement in favor of counties for the purposes of construction, maintenance, or reconstruction of natural or artificial drainage channels. IC 36-9-27-33(a). Section 36-9-27-33(d) further provides that "[p]ermanent structures may not be placed on any right-of-way without the written consent of [the county drainage] board." For those who wish to convert farmland into residential areas, the obvious consequence is that special attention should be paid to whether any structures are to be built within 75 feet of an otherwise regulated drain. If so, it is necessary to obtain consent of the county's drainage board to build structures on this part of the tract.

Illinois Farm Tenancy Leases

Whether a farm lease has been properly terminated can be of enormous significance to potential investors in farmland, particularly in cases of year-to-year leases. While most well-written leases will contain the method and time of termination, Illinois law does provide for some default rules in case this is not provided for. 735 ILCS 5/9-206 provides: "In order to terminate tenancies from year to year of farm lands ... the notice to quit shall be given in writing not less than 4 months prior to the end of the year letting." Because in most areas of Illinois, a farm tenancy is presumed to expire on the last day of February, this typically means that October 31 is the last day that either a farmer or an operator can terminate a year-to-year lease with respect to the following year.

The practical implications then for investors are apparent. All inquiries should be made with the current owner of the farmland to determine whether the land has been leased recently and whether this lease has properly been terminated. If either the contract between the farmer and lessee unambiguously states a termination date for the lease or the farmer can show that on or prior to October 31 of the relevant year the lease was properly terminated (see next paragraph), there should be no conflicting interests in the farmland as a result of the previously-held lease.

A year-to-year lease for farmland is properly terminated under 735 ILCS 5/9-211 by delivering or mailing a written or printed copy to the tenant or anyone age 13 or over residing on the premises. More practically, the terminator of the lease can notify the other party of termination by "sending a copy of the notice to the tenant by certified or registered mail, with a returned receipt from the addressee." If evidence of this can be shown, your client is in good shape with respect to the termination of the prior lease.

Maintaining Farmland Valuation for Tax Purposes in Illinois

Sections 10-115 through 10-145 of the Illinois Property Tax Code, codified at 35 ILCS 200, provide for a different valuation method for assessing farm property tax, and farmers often take advantage of this. However, a change in hands to a residential developer will not automatically cause the property to lose any of the benefits of these lower valuations. Indeed, Section 10-30 of the Property Tax Code was passed to assist real estate developers who convert farmland into residential areas by keeping tax assessment from increasing if all of the following are true:

  1. The property is platted and subdivided in accordance with the Plat Act (765 ILCS 205/0.01 et seq.);
  2. The platting occurs after January 1, 1978;
  3. At the time of platting the property is in excess of ten acres; and
  4. At the time of platting the property is vacant or used as a farm as defined in Section 1-60.

35 ILCS 200/10-30(a).


Construed together with Section 9-65 (regarding reassessment), however, developers will be subject to an increased tax "whenever a subdivision of farmland coincides with the property's change to residential use, such as when the property is developed with roads, sidewalks, utility lines, water, curbs, gutters, and sewers, as provided in section 10-30" (emphasis added). Bond County Bd of Review v Property Tax Appeal Bd, 343 Ill App 3d 289, 796 NE2d 628, 277 Ill Dec 542 (5th D 2003).

Thus, Section 10-30 will apply as long as the land is platted and subdivided; however, as soon as the land use changes to residential use, the land will be re-assessed under Section 9-65 and taxed accordingly. Therefore, as a practical matter, any developers who are planning to build, but not use property should make sure that the tax assessed on the property is the same tax that was assessed during the prior ownership - so long as the property is in a transitional state and is not being used for a residential purpose.


In summary, although farmland transactions share much in common with ordinary residential transactions, any prospective purchaser of farmland should take into account the relevant legal considerations outlined above to ensure the smoothest possible transfer of title. Ideally, any difficulties created by applicable laws should be sorted out before the transaction takes place. Among the perils of diving into a farmland transfer without ensuring clarity both with respect to land title and land use is the potentially permanent inability to develop the land for residential use. One of the easiest and most practical ways to ensure that many of the issues above will not pose trouble is to make inquiries regarding these issues with the current owner of the land.

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