New law limits who can own agricultural land in Ohio

The State of Arkansas made history last month when it took steps to enforce its new law restricting foreign ownership of land in the state.  Arkansas ordered Northrup King Seed Co., a subsidiary of Syngenta held by China-owned company ChemChina, to give up 160 acres of Arkansas farmland it owned.  The State also assessed a $280,000 fine against Syngenta for failing to disclose the land ownership.  The actions are the result of a new foreign ownership law enacted by the Arkansas legislature earlier this year. 

Joining Arkansas and ten other states, Ohio also passed a law restricting foreign ownership of land earlier in 2023.  Ohio’s new “Save our Farmland and Protect our National Security Act” quietly became effective last month.  The law limits who can own agricultural land in the state and requires persons or entities who cannot own Ohio farmland to forfeit title to the property, which the State will then sell.  The purpose of the law, according to the legislature, is “to recognize that Ohio has substantial and compelling interests in protecting its agricultural production.”

Who is restricted from owning agricultural land in Ohio

The law is not an absolute restriction on foreign ownership of land.  Instead, the law prohibits agricultural land ownership by any “person” listed on a registry compiled by Ohio’s Secretary of State.  A “person” can include an individual, firm, company, trust, business or commercial entity, organization, joint venture, non-profit, or non-U.S. government.  The prohibition applies not just to the person listed on the registry, but also to any agent, trustee, or fiduciary of the person.

The Ohio Secretary of State must compile the “registry” by identifying and including any person that constitutes a threat to the agricultural production of the state. To develop the registry, the Secretary of State must consult several federal sources, including the list of foreign adversaries, terrorist exclusion list, list of countries that have provided support for acts of international terrorism, and persons designated by two presidential Executive Orders.  In accordance with the law, Ohio’s Secretary of State has compiled the registry and published it online at https://www.ohiosos.gov/publicintegrity/save-our-farmland/.

Exceptions to the ownership restrictions

The restriction does not apply to any agricultural land acquired before the act’s effective date of October 3, 2023.  Nor does it apply to a transfer of land to a person on the registry through inheritance, gift, collection of a debt, foreclosure, or enforcement of a lien.  However, in these instances, the person must divest itself of the title and any interest in the land within two years of receiving the property.  And while holding the land until divestiture, the person cannot use it for any purpose other than agriculture or lease it to any person on the registry.

Enforcement of the law

Enforcement involves both the Secretary of State and the Ohio Attorney General.  If the Secretary of State finds that a person listed on the registry has acquired title or an interest in land in violation of the law, the Secretary of State must report the violation to the Attorney General.  Others can report land ownership by a person on the registry via the Secretary of State’s web page for the registry, https://www.ohiosos.gov/publicintegrity/save-our-farmland/.

Upon learning of the violation, the Attorney General must initiate a legal action in the county where the land is located.  If the court agrees that the ownership violates the law, it shall file an order allowing the state to take ownership of the land and ordering the land to be sold at public auction, following required legal procedures.  Proceeds from the sale are to be applied first to any court costs and expenses, then to the registered person.  That amount is limited, however, to the actual cost paid by the registered person for the land.  If any sale proceeds remain, the funds are to be paid to the general fund of each county where the land is located, proportionate to the acreage in the county.

Learn more on our next Farm Office Live

Join us on November 17 at 10 a.m. for our next version of Farm Office Live, a farm management and ag law update webinar by OSU’s Farm Office team.  We’ll discuss Ohio’s new foreign ownership law and talk with Micah Brown, staff attorney with the National Agricultural Law Center, about foreign ownership restrictions in the U.S. and what they mean for agriculture.  The Farm Office team will also cover Using Charitable Remainder Trusts, Ohio’s Role in Organic Grain Production, Farm Business Analysis Update, and Farmer Mental Health Concerns and Resources.  Register for Farm Office Live at https://farmoffice.osu.edu/farmofficelive.

Read the primary provisions of Ohio’s Save Our Farmland and Protect Our National Security Act in Ohio Revised Code Section 5301.256. The Ohio Legislature enacted the law in House Bill 33, the biennial budget bill.

Different Deeds Mean Different Things

In the world of real estate transactions, deeds play a crucial role in transferring property ownership from one party to another. Ohio, like many other states, offers several types of deeds, each with its own set of characteristics and implications. Understanding the differences between these deeds is essential for both buyers and sellers. In this article, we will explore four common types of deeds in Ohio: General Warranty Deed, Limited Warranty Deed, Quitclaim Deed, and Fiduciary Deed, and highlight the distinctions between them.

General Warranty Deed

A General Warranty Deed is one of the most comprehensive and protective deeds available in Ohio. When a property is conveyed through a General Warranty Deed, the seller (grantor) provides an extensive set of warranties and assurances to the buyer (grantee). These warranties include:

a. Warranty of Title: The seller guarantees that they hold clear and marketable title to the property and will defend the buyer against any claims or defects in title that may arise before or during their ownership.

b. Covenant of Quiet Enjoyment: The seller promises that the buyer will have peaceful and undisturbed possession of the property, free from interference or claims by others.

c. Covenant Against Encumbrances: The seller assures the buyer that there are no outstanding liens or encumbrances on the property, except as specified in the deed.

General Warranty Deeds provide the highest level of protection to buyers and are typically used in traditional real estate transactions. They are considered the gold standard of deeds. 

Example: Farmer buys a farm from Seller.  Later, Farmer tries to use the farm as collateral and discovers there is an unpaid contractor’s lien from the previous owner to Seller. With a General Warranty Deed, Seller is responsible for addressing and clearing the lien so that Farmer can proceed with their plans.

Limited Warranty Deed

A Limited Warranty Deed, also known as a Special Warranty Deed, offers a more limited set of warranties compared to a General Warranty Deed. In a Limited Warranty Deed, the seller guarantees that they have not caused any defects in title during their ownership, but they do not warrant against defects that may have existed before their ownership. Essentially, the seller is only responsible for title issues that occurred while they owned the property.

Limited Warranty Deeds are commonly used in commercial real estate transactions and can offer some protection to buyers while limiting the seller’s liability.

Example.  Using the previous example with a Limited Warranty Deed, Seller would not be liable to Farmer because the title issue was created prior to Seller owning the property.  Seller would only be liable to Farmer if the title issue was created while Seller owned the farm.

Quitclaim Deed

A Quitclaim Deed is a deed that conveys the seller’s interest in a property without making any warranties or guarantees about the quality of title. Essentially, the seller is saying, “I’m giving you whatever interest I have in this property, if any.” Quitclaim Deeds are often used in situations where property is transferred between family members, in divorce settlements, or to clear up questions about property ownership.

It’s important to note that while Quitclaim Deeds provide no warranties, they can be a quick and straightforward way to transfer property interests when the parties involved trust each other.

Example: Sarah and her sibling, David, jointly inherited a farm. Sarah decides to buy out David’s share, and they use a Quitclaim Deed for the transfer. David, by signing the Quitclaim Deed, is essentially relinquishing any interest he may have in the farm without making any claims or guarantees about the farm’s title. This allows Sarah to take sole ownership.

Fiduciary Deed

A Fiduciary Deed is used when the person transferring the property is acting as a fiduciary, such as an executor of an estate or a trustee of a trust. These deeds convey the property interest held by the estate or trust to the designated beneficiaries. A fiduciary deed warrants that the fiduciary is acting in the scope of their appointed authority, but it does not guarantee title of the property.  This deed relieves the executor or trustee of liability for title defects so that people will be more willing to serve in a fiduciary capacity.

Example.  Sarah’s father passed away and she is the trustee of his trust. As part of the trust administration, she needs to transfer ownership of her father’s farm to herself and her siblings. Sarah would use a Fiduciary Deed to convey the property to the beneficiaries.  If a title defect is later discovered, Sarah will not be liable to the beneficiaries. 

Conclusion

In Ohio, the choice of deed in a real estate transaction is a critical decision that can have significant legal and financial implications for both buyers and sellers. General Warranty Deeds offer the highest level of protection, while Limited Warranty Deeds limit the seller’s warranties to their period of ownership. Quitclaim Deeds provide no warranties at all but can be useful in certain situations. Fiduciary Deeds are used in trust and estate scenarios, recognizing the grantor’s fiduciary role.

Before entering into any real estate transaction in Ohio, it is advisable to consult with legal professionals who can provide guidance on the most appropriate type of deed for your specific situation. By understanding the differences between these deeds, you can make informed decisions and ensure a smooth and legally sound property transfer process.

What is a Land Contact?

The term “Land Contract” is often used as a generic name for any land installment sale where the buyer makes payments to the seller over time.  However, a land contract has a specific meaning under the law and does not apply to all installment sales. A land contract is one type of land installment sale while seller-financed is another.  While the land contract and seller-financed option allow buyers to acquire property without traditional bank financing, they differ significantly in terms of legal implications and practical considerations.  In this article, we will discuss the difference between a land contract installment sale and a seller-financed installment sale.

Land Contracts: An Overview

A land contract is a legal agreement between a property seller and a buyer. In this arrangement, the buyer agrees to purchase the property over time by making regular payments to the seller, who retains legal title to the property until the contract is fully paid off. After the final payment is made, the seller signs the deed over to the buyer.  Land contracts are a popular choice for buyers who may not qualify for traditional financing due to credit issues or other reasons.

Key Characteristics of Land Contracts in Ohio:

Legal Title: In Ohio, the seller retains legal title to the property until the contract is satisfied, while the buyer obtains equitable title, allowing them to possess and use the property.

Payment Structure: Buyers make monthly or annual payments to the seller, including principal, interest, and sometimes taxes and insurance. The specific terms are negotiable and outlined in the contract.

Default Consequences: If the buyer defaults on payments and the contract has been in effect for less than five years or less than 20% of the payment has been made, the seller can terminate the contract and retake possession of the property.  If the contract is older than five years or more than 20% of the purchase price has been paid, the seller must foreclose and will be paid from the proceeds of a judicial sale.

Legal Requirements:  Ohio Revised Code Section 5313.02 requires sixteen specific requirements for a land contract.  If entering a land contract, be sure all requirements are met so that the land contract is enforceable for both buyer and seller.

Seller-Financed Land Sales: An Overview

Seller-financed land sales involve the property seller acting as the lender, providing financing to the buyer for the purchase. Legal title to the property is transferred to the buyer at the time of sale.  This method allows buyers to acquire the property without the need for a traditional bank loan.

Key Characteristics of Seller-Financed Land Sales in Ohio:

Title Transfer: Unlike land contracts, seller-financed land sales typically involve the immediate transfer of both legal and equitable title to the buyer upon the completion of the sale.

Payment Structure: Buyers make regular payments to the seller, which include principal and interest, similar to a traditional mortgage. These terms are negotiated between the parties and documented in a promissory note and mortgage.  The mortgage provides security to the seller in the event the buyer defaults.

Default Consequences: If the buyer defaults on payments, the seller can initiate a foreclosure proceeding, similar to traditional lenders, to ensure payment is made.

Legal Requirements:  There are no specific legal requirements for a seller-finance sale.  However, a promissory note should be provided to the seller that includes the amount owed, interest rate and payment schedule.  A mortgage should also be executed and recorded to provide security to the seller in the event of buyer’s default.

Key Considerations

Title Transfer: The most significant difference between land contracts and seller-financed land sales in Ohio is the timing of title transfer. In a land contract, the seller retains legal title until the contract is fully satisfied, while in seller-financed land sales, both legal and equitable title transfer to the buyer upon sale completion.

Negotiability: Both methods offer flexibility in negotiating terms, including interest rates, down payments, and property responsibilities. Buyers and sellers should carefully consider and document these terms to avoid future disputes.

Legal Assistance: Given the complexities of real estate transactions, it is advisable for both buyers and sellers to seek legal counsel to ensure that the chosen method aligns with their interests and complies with Ohio law.

Which is Better?

It depends.  For the seller, a land contract is often better because the deed is not transferred until the final payment is made.  This allows the seller to keep legal title and potentially have more protection if the buyer defaults.  For the buyer, the seller-financed option is usually better.  The seller will prefer to have the legal title throughout the transaction so that they have full control over the property.  Tax consequences are similar for both a land contract and seller-financed sale.

Conclusion

When it comes to land transactions in Ohio, understanding the difference between land contracts and seller-financed land sales is crucial. These methods provide alternatives to traditional financing, but they come with distinct legal and practical implications. Buyers and sellers should carefully evaluate their options, negotiate terms diligently, and consider consulting legal professionals to ensure a smooth and legally compliant transaction. Ultimately, a well-informed decision can lead to a successful and mutually beneficial real estate transaction.

Are Crops Part of the Land?

A situation that can arise between landowners and tenants is the ownership of a crop upon the termination of a lease or transfer of the property.  Like most legal questions, the answer depends upon the specifics of the situation.  Sometimes, crops are part of the land and sometimes the crop is personal property and not part of the land.  The following is a discussion of these different scenarios.

The most common scenario, and the most common type of lease, is for annual crops such as corn and soybeans.  Annual crops are generally personal property and not part of the land.  If a landowner transfers the land midway through a lease, the tenant will retain ownership of the crops and will have an opportunity to harvest the crops.

Wheat is a unique situation in that it is a carryover crop, planted in the fall and harvested in summer.  The wheat will generally be personal property and owned by the tenant with one exception.  If the wheat was planted by the tenant before a lease for the following year was established, a court may determine that the tenant planted the wheat at their own risk.  Wheat should not be planted unless a lease for the following year is in effect.

Situations relating to perennial crops such as hay largely depend on timing.  If the land is transferred shortly after the crop is established, the tenant may be able to continue harvesting the crop or more likely the landowner will be liable to the tenant for the cost of establishing the crop and possibly lost profits.  If the land is transferred several years after the crop is established, the tenant may not have any claims to the crop.  A court will largely look to the intentions of the landlord and tenant in rendering its opinion on the tenant’s rights.

All of the above scenarios can be avoided by a good, written lease.  The lease should address the tenant’s rights to the crop in the event the land is transferred during the term of the lease.  The landowner and tenant can agree to address the rights of the tenant, in the event the land is transferred, in any way they wish.  For tenants and landowners in current leases, the lease should be reviewed to see how tenant’s rights are addressed in the event of a transfer of the land.  For situations where there is no written lease or for new leases, be sure to include a provision to address the tenant’s rights to the crop.

Like-Kind Exchange Basics

Like-Kind Exchange Basics

Many people are familiar with a Like-Kind Exchange (LKE) as a strategy to potentially save taxes on the sale of real estate.  While it is true LKEs can be used to defer significant taxes, the process required to implement LKEs it often not well understood.  The following are answers to a few of the more common questions about LKEs.  A better understanding of LKEs may help you determine if a LKE may be an option for your next real estate transaction.

What Property Can Be Exchanged?

Prior to January 1, 2018, many different types of property could be exchanged including machinery and livestock.  The 2018 Tax Cuts and Jobs Act restricted the type of property allowed for a LKE to only real estate.   Fortunately, real estate is defined broadly in the context of a LKE.  Real estate used in a LKE are subject to the following rules:

1. Must be held for business or investment purposes but does not need to be similar in grade or quantity
2. Primary residences do not qualify
3. Properties must be held in the United States

Other than personal residences, almost any other type of real estate can be exchanged.  For example, an office building can be sold and the proceeds used to buy farmland.  These two very different types of real estate would likely qualify for a LKE provided they are held for business or investment purposes.

Are There Different Types of LKEs?

There are generally three different types of LKEs.  The first is a simultaneous trade which involves one owner exchanging their real estate for real estate owned by another.  The exchange occurs by the owners executing deeds transferring their real estate to each other.  For example:

Andy owns farmland in Ohio valued at $1 million.  He makes a deal with his friend Ashley.  Andy will trade his farmland for Ashley’s farmland in Illinois valued at $1 million.   Andy executes a deed transferring his farmland to Ashley and Ashley executes a deed transferring her farm to Andy.

The above example shows how a simultaneous trade works.  The parties simply swap their property.

Another type of LKE is a deferred exchange.  This strategy involves selling real estate, then using those proceeds to buy replacement real estate.  The following is an example of a deferred exchange:

Andy owns farmland in Ohio valued at $1 million.  He decides he wants to buy farmland in Illinois.  Ashley wants to sell her farmland for $1 million.  Andy sells his farmland in Ohio and uses those sale proceeds to purchase Ashley’s land for $1 million.  Andy will not pay tax on the sale of the Ohio farmland because he purchased a replacement property.  Ashley will pay tax on her sale because she did not purchase a replacement property.

The other type of LKE is a reverse exchange.  This LKE is used when the replacement property is purchased first and then the owned real estate is sold.  This strategy is used when, due to timing, the replacement property must be purchased before the relinquished property is sold.  The following is an example of a reverse exchange:

Same facts as above except that the farm in Illinois that Andy wants to buy is going to sell next week.  Andy does not have time to sell his Ohio farm first.  Andy buys the Illinois farm first using cash from his savings.  Andy essentially loans $1 million  to the title company.  The title company takes title to the Illinois land and holds until Andy can sell the Ohio land.  Two months later he sells the Ohio farm and uses those sale proceeds to pay for the Ohio property with the original loaned funds being returned to Andy. 

A reverse exchange is complicated and usually requires the assistance of companies that specialize in LKEs.  Furthermore, the person doing the reverse exchange must have enough money available to purchase the replacement property while waiting on the owned property to sell.

Are Taxes Avoided with a LKE?

Technically, taxes are deferred with a LKE.  The reason it is a deferral of taxes is that the tax basis follows the taxpayer.  This can best be explained using an example:

Andy paid $300,000 for a farm he owns in Ohio.  The Ohio farm is currently valued at $1 million.  He has decided that he wants to purchase a farm in Illinois valued at $1 million.  He executes a LKE by selling the Ohio farm and purchasing the Illinois farm.  The tax basis in the Ohio farm of $300,000 is transferred to the Illinois farm.  So, instead of the Illinois farm having a tax basis of the purchase price ($1 million), it has a tax basis of $300,000.  If Andy sells the Illinois farm, he will pay capital gains tax on the sale price exceeding $300,000.  Therefore, the tax implications of the LKE were deferred until the Illinois property is sold by causing the tax basis of the Ohio farm to transfer to the Illinois farm. 

As the above example shows, a LKE defers capital gains tax but does not necessarily eliminate taxes.  By transferring the tax basis from the relinquished property to the replacement property, the capital gains will be fully realized upon the sale of the replacement property.

What if the Properties are not the Same Value?

Properties being exchanged are rarely the same value and some money may need to be paid to offset the difference in value. Because money is not eligible for a LKE, that portion of the exchange will be taxable.  Consider the following example.

Andy owns a farm valued at $1.2 million and intends to participate in a simultaneous exchange for a farm valued at $1 million owned by Ashley.  Andy will receive Ashley’s property plus $200,000.  The LKE will defer taxes on the $1 million property received but Andy will pay tax on the $200,000 payment. 

Is Timing important for LKEs?

Timing is very important for a LKE.  A simultaneous exchange, as the name would suggest, must occur by transferring the properties at the same time.  For a deferred exchange, the replacement property must be identified within 45 days of the sale and the replacement property must be purchased with 180 days of the sale.  For a reverse exchange, the relinquished property must be sold within 180 days of the purchase.  There is no flexibility with these deadlines, if a deadline is missed the LKE is not allowed.

Who Can Participate in an LLC?

In a LKE, the same person must be on both sides of the exchange.  A person can be a business entity, trust, or estate in addition to an individual.  This rule can be an issue when a business entity owns the property because the entity, and not the individual owners, must complete the exchange.  For example:

Andy and Ashley are the owners of AB Farms LLC that owns Blackacre farm.  They decide to sell Blackacre farm.  Only AB Farms LLC is eligible to use the sale proceeds in a LKE.  Neither Andy nor Ashley can take their share of the sale proceeds and participate in a LKE.

Another issue may be related parties.  Related parties are defined in IRS sections 267(b) and §707(b)(1) and are generally brothers, sisters, spouse, ancestors and lineal descendants for individuals and for business entities with more than 50% of the stock, membership interests or partnership interests owned by a related party.  Some types of LKEs are not available to related parties and for other LKEs there are special rules for related parties.  The details for related parties are extensive LKEs are beyond the scope of this article.  Be sure to work with an attorney familiar with LKEs when related parties are involved.

Who Handles the Money?

In a deferred exchange, the sale proceeds cannot be held by the seller.  An intermediary, usually a title company, will hold the money in escrow after the property is sold and before the replacement property is purchased.  Any sale proceeds held by the seller are immediately ineligible for a LKE.  In a reverse exchange, an intermediary holds the purchased real estate until the relinquished property is sold.  In a deferred exchange or reverse exchange, the intermediary serves a vital and necessary role.

The above questions and answers are some of the more common questions with general answers.  There are many rules, exceptions and details in addition to the issues discussed in this article.  Before engaging in a LKE, be sure to consult with an attorney familiar with LKE rules.  You only get one chance to get a LKE right, any missteps will likely cause the LKE to fail and tax will be owed on the exchange.