Specialized Returns and Taxpayers · Farmers

Farm rental

Farm rent is the one place in the Code where the same economic arrangement produces three different returns depending on what the landlord actually does. The tax at stake is not income tax — the income is taxable either way — but self-employment tax, and the line is drawn by material participationmaterial participationBeing involved in running a business regularly, continuously, and substantially enough that the activity isn't treated as merely passive for tax purposes. written into the lease and then carried out.

The rule

The general exclusion (IRC § 1402(a)(1)). net earnings from self-employment exclude rentals from real estate and from personal property leased with it — including rentals paid in crop shares — together with the deductions attributable to them, unless received in the course of a trade or business as a real estate dealer (IRC § 1402(a)(1))^TY2026Verified 2026-08-21IRC § 1402(a)(1), read at law.cornell.edu/uscode/text/26/1402 Rent from land is not self-employment income. That is the starting point and it covers most farm landlords.

The farm exception. that exclusion does not apply to income derived by the owner or tenant of land where the income arises under an arrangement with another individual providing that the other individual will produce agricultural or horticultural commodities on the land and that there will be material participation by the owner or tenant in the production or the management of the production, and there is in fact material participation by the owner or tenant — in each case determined without regard to the activities of any agent (IRC § 1402(a)(1)(A), (B))^TY2026Verified 2026-08-21IRC § 1402(a)(1), read at law.cornell.edu/uscode/text/26/1402 the material participation exception has two conditions and both must be met: the arrangement itself must provide for the owner’s material participation, and the owner must actually materially participate. An arrangement silent on participation does not produce self-employment income however active the owner in fact is (IRC § 1402(a)(1))^TY2026Verified 2026-08-21IRC § 1402(a)(1), read at law.cornell.edu/uscode/text/26/1402 Read the conjunction: the arrangement must provide for material participation and there must be material participation. A handshake lease that says nothing about the landlord’s role fails the first condition however much work the landlord does.

Where each lands. a farm landlord who materially participates reports on Schedule F and pays self-employment tax; one who does not but is paid a share of the crop or livestock produced reports on Form 4835 and pays none; and one paid a fixed cash rent reports on Schedule E and pays none^TY2026Verified 2026-08-21IRC § 1402(a)(1), read at law.cornell.edu/uscode/text/26/1402, and IRS, About Form 4835, read at irs.gov/forms-pubs/about-form-4835 Form 4835, Farm Rental Income and Expenses, is filed by landowners and sub-lessors who do not materially participate in the operation or management of the farm, to report farm rental income based on crops or livestock produced by the tenant^TY2026Verified 2026-08-21IRS, About Form 4835, read at irs.gov/forms-pubs/about-form-4835 Form 4835 exists precisely for the middle case — a landlord paid in crop or livestock, so not on a fixed rent, but not materially participating either.

When the income is recognised. crop shares, whether or not treated as rent under state law, are included in gross income in the year they are reduced to money or the equivalent of money (Treas. Reg. § 1.61-4(a))^TY2026Verified 2026-08-21Treas. Reg. § 1.61-4(a), read at law.cornell.edu/cfr/text/26/1.61-4 A crop-share landlord on the cash method has income when the share is sold or otherwise turned into money, not when the crop is harvested and stored in the landlord’s name.

The passive loss overlay. a rental activity is a passive activity regardless of the taxpayer’s participation, except as IRC § 469(c)(7) provides for real property trades or businesses (IRC § 469(c)(2))^TY2026Verified 2026-08-21IRC § 469(c), read at law.cornell.edu/uscode/text/26/469 Material participation for IRC § 1402 and material participation for IRC § 469 are tested under different standards, so a landlord can be paying self-employment tax on Schedule F income that is nonetheless passive, or the reverse. The two statutes ask the same question with different rules and the answers need not match.

And the self-rentalself-rentalRenting property to a business the owner also runs. Special rules can turn what looks like an ordinary passive rental into non-passive income or loss. trap. gross rental activity income from an item of property, up to the net rental activity income from that property for the year, is treated as not from a passive activity where the property is rented for use in a trade or business activity in which the taxpayer materially participates — so rent from a farm the owner also farms through an entity is non-passive income that cannot absorb passive losses (Treas. Reg. § 1.469-2(f)(6))^TY2026Verified 2026-08-21Treas. Reg. § 1.469-2(f)(6), read at law.cornell.edu/cfr/text/26/1.469-2

Current figures

How it works in practice

Read the lease before deciding anything. IRC § 1402(a)(1)(A) requires the arrangement to provide that there shall be material participation by the owner in the production or the management of the production. That is a term of the contract, not a description of behaviour, and it is the condition most often missing. A landlord who walks the fields weekly, chooses the seed varieties and shares the input costs is materially participating in fact — but if the lease is a bare crop-share agreement with no participation clause, the income stays outside self-employment tax and belongs on Form 4835.

Then look at what the landlord does, and disregard what an agent does. The statute says material participation is determined “without regard to any activities of an agent of such owner or tenant.” A landlord who hires a farm manager to make every decision has not thereby materially participated, and the fact that the manager’s work would qualify if the landlord did it makes no difference.

Distinguish rent from a share of the enterprise. A landlord paid a fixed cash rent per acre has rental income on Schedule E whatever else happens. A landlord paid a percentage of the crop is sharing in the production, and the question of participation arises. A landlord who owns the livestock and pays the tenant for care is not a landlord at all as to that enterprise — the milk or the calves are the landlord’s farm income on Schedule F, and the payment to the tenant is a farm expense.

Watch the interaction with IRC § 199A. Crop-share and cash rent from land let to an unrelated tenant may or may not be a trade or business for that purpose, and the safest position is a landlord who is already on Schedule F. The self-rental rule in Treas. Reg. § 1.469-2(f)(6) is a separate point again: where the landlord rents to an entity in which they materially participate, the rental income is recharacterised as non-passive so it cannot soak up passive losses from elsewhere, while the rental losses remain passive.

How this has changed

The material participation exception in IRC § 1402(a)(1) has been in the statute since the Social Security Amendments of 1956 brought farm landlords into coverage, and its two-condition structure has not moved. What has moved is the litigation around it. The courts have repeatedly considered whether rent paid by a farming entity to its owner-operator is within the exception, and the position now is that a lease at arm’s length rates between a landlord and a separate operating entity is ordinarily outside self-employment tax notwithstanding the landlord’s work for the entity, following the line of cases beginning with McNamara in the Eighth Circuit.

The self-rental rule at Treas. Reg. § 1.469-2(f)(6) was upheld against challenge and has been stable since the 1990s. Its practical importance has grown with the number of farms operating through an entity while holding land personally, which is now the common structure.

IRC § 199A brought a new question with no farm-specific answer: whether a bare land lease is a trade or business for the deduction. The regulations treat a rental to a commonly controlled trade or business as one, which covers the incorporated-farm case, and leave an arm’s length lease to an unrelated tenant to the general standard. Pub. L. 119-21 § 70105(b)(1) made the deduction permanent, so the question is no longer time-limited.

Conservation reserve program payments to a landlord are a live issue the statute answers only partly: IRC § 1402(a)(1) excludes them from self-employment income where the recipient is receiving Social Security retirement or disability benefits, by the express reference to section 1233(a)(2) of the Food Security Act of 1985. For everyone else the character of those payments has been contested.

Exam focus

Know the three-way split and the form that goes with each: Schedule E for cash rent, Form 4835 for crop-share without material participation, Schedule F for crop-share with it.

Know both conditions of the exception, that the arrangement must provide for participation as well as the participation occurring, and that an agent’s activities are excluded from the test.

Know that a landlord who owns the livestock or the crop is not a landlord as to that enterprise at all. Know the self-rental rule and that it recharacterises income but not loss.

Check yourself

1. A landlord takes one quarter of the tenant’s crop proceeds under a lease that says nothing about her involvement. She visits twice a year. Which form?

Answer: Form 4835. The income is based on crops produced by the tenant, so it is not fixed cash rent for Schedule E. But IRC § 1402(a)(1)(A) requires the arrangement to provide for material participation and this one does not, so the income is excluded from self-employment income and belongs on Form 4835 rather than Schedule F. Her two visits would not amount to material participation in any event.

2. A landlord’s written lease requires her to approve the crop plan, inspect monthly and pay half the seed cost. She hires a farm manager who does all of it. Is the income self-employment income?

Answer: No. IRC § 1402(a)(1) determines material participation “without regard to any activities of an agent of such owner.” The manager is her agent, so his work cannot be attributed to her, and she has not materially participated. The lease satisfies subparagraph (A) but subparagraph (B) fails, and both are required.

3. A farmer rents land to his own S corporation, in which he works full time, for $60,000. He has $25,000 of passive losses from a rental condominium. May he offset them?

Answer: No. Treas. Reg. § 1.469-2(f)(6) treats the net rental income from property rented for use in a trade or business in which the taxpayer materially participates as not from a passive activity. The $60,000 is non-passive, so the condominium losses have no passive income to absorb them and remain suspended.

4. A landowner lets pasture for a fixed $12,000 a year and does nothing else. Does she owe self-employment tax?

Answer: No. IRC § 1402(a)(1) excludes rentals from real estate from net earnings from self-employment unless received in the course of a trade or business as a real estate dealer. Fixed cash rent is not a share of production, so the farm exception cannot apply, and the income is reported on Schedule E.

5. A crop-share landlord takes her share in grain in November 2026 and stores it, selling it in February 2027. She is on the cash method. When is the income recognised?

Answer: In 2027. Treas. Reg. § 1.61-4(a) provides that crop shares, whether or not treated as rent under state law, are included in gross income in the year they are reduced to money or the equivalent of money. Taking delivery of the grain is not reducing it to money; selling it is.