Defensible Space Helps Safeguard Against Wild Fires

By: Randy Shelton

With many parts of the West at risk from wildfires, it has become more and more common for potential buyers as well as current sellers to ask how their improvements can be safeguarded from fire destruction. The most effective prevention is maintaining a defensible space.  Defensible space is an established area around your house that creates a defensible position for firefighters to do their job.  Structures are more likely to withstand a wildfire if brush, trees and other common forest fuels are removed or at least reduced. This is the best way to minimize your structure’s damage and stop the fire from spreading to adjacent fuel sources.

A good example of maintained defensible space can be seen at the 3,070± acre Cove Canyon Ranch sits just 20 minutes west of downtown Billings.

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What’s in a Rain?

Rain is one of those things that we often take for granted until we don’t get enough of it or inundated with too much. It is elusive, yet common. It is something that we have absolutely no control over, and so we must learn to adapt. Rain is one of those subjects that unites people of all walks of life, particularly those with rural backgrounds. It is almost without exception that rain is always the initial topic to start a conversation. Hence, any self-respecting ranch broker will be well versed in the current climatological conditions of most any region, nearby or distant, that he might be in contact with. Too much rain, untimely rain, summer monsoons, and recurring rain shortfalls, and various stages of drought are all fair sub-topics potentially levied into a conversation. Why is rain such an important topic? Because one rain can change everything, yes everything.

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One rain can be the difference between selling light calves and heavy calves.

One rain can be the difference in the spread of a wildfire.

One rain can keep the banker from calling a note due.

One rain can change a poorly germinated crop into a viable one.

One rain can change fawn survival in the deer herd.

One rain can flood a crop ready for harvest.

One rain can make a ranch ready to be photographed before it’s put on the market.

One rain can wash out the only bridge between you and town.

One rain can turn an oppressively brown horizon lush green.

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So, the next time you are asked about the weather, don’t take it as casual small talk or unsophisticated rural charm. It’s everything.

Beachfront Paradise on Oso Peninsula of Costa Rica Hits Market

By: Bill McDavid

Years ago, I spent three weeks in Costa Rica exploring its interior and west coast from the Nicoya Peninsula all the way south to the Osa Peninsula right next to Panama. At the time, I was simply on a personal quest to see another land and wasn’t thinking at all about real estate. I was fascinated with and had never seen (and still haven’t) so much diversity packed into a relatively small country.

I started in a geothermal wonderland near the Arenal Volcano where I sat in a hot spring like none I have seen elsewhere. Picture a clear, mountain stream tumbling over boulders… with hot water. I traveled over the mountains through the Monteverde Cloud Forest down onto the Pacific Coast where tiny towns like Santa Teresa and Mal Pais exist because of a thriving surf culture. I made my way south towards the Osa, a place that National Geographic calls the most biologically intense place on earth.

This region quickly became one of my favorite places on earth. I boated across the bay to the Osa Wildlife Sanctuary where I met “Sweetie”, an orphaned monkey who had been raised by humans. She had recently received a nasty bite on her leg. She beckoned me with her eyes and showed me exactly how she wanted to scratch it in a most human way. I felt as if I had just encountered a talking dog. Sweetie rode around on my shoulders and introduced me to all sorts of creatures from avian to reptilian.

Now years later, my experience there has translated to an opportunity to market a piece of property that would lead most to gasp in disbelief that it is possible to even own something like this. Finca Rio Oro is a substantial holding by any measure. Not only is there a multitude of flora and fauna, there is also over a mile of frontage on the planet’s largest ocean which is teeming with life. Costa Rica is all about life… pura vida.

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Maintaining & Protecting Your Water Rights

By:  Deborah Stephenson and Stephen R. Brown

This article is the second in a continuing series regarding water in the western United States. This edition focuses on operational and administrative practices that can help maintain your water rights by first ensuring that all filings and administrative reporting requirements are up to date, and secondly, by keeping your rights active to protect them from abandonment.

The initial registration and ongoing reporting requirements for your water rights vary from state to state and by type of water entitlement. For example, in most western states small water users can be exempt from a lengthy permitting process. This instance is commonly referred to as an “exempt filing.” However, water users are still typically required to register these small water uses with the state or local groundwater management agency. Another example is that certain types of water certificates, permits, and change authorizations may have annual reporting requirements related to the permit holders’ annual water diversions. Other reporting requirements call for weekly monitoring of the physical flow rates in the source of supply to ensure that pre-existing water rights are met before any new permit is utilized.

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Other examples of both water use registration and subsequent reporting requirements are found in Texas and California. In Texas, the state water planning process, originating in the mid-1950s, created regional planning areas and smaller groundwater conservation districts (GCDs) within the regional planning areas. There are no statewide requirements for registration or reporting of groundwater use. Instead, the local GCDs are tasked with creating groundwater management goals and then implementing groundwater registration and reporting requirements to achieve the GCDs’ goals. Because each GCD approaches these tasks differently, it is important to be involved with your local GCD to ensure that all groundwater uses are properly registered and reported each year.

In 2014, California passed new legislation regarding groundwater use called the Sustainable Groundwater Management Act (SGMA). Within certain high and medium priority basins, SGMA requires governments and water agencies to halt overdraft and bring groundwater basins into balanced levels of pumping and recharge. To implement SGMA, local agencies formed Groundwater Sustainability Agencies (GSAs) in 2017. The GSAs are now working to define safe-yields and allowable groundwater withdrawals within their local areas and work towards adopting Groundwater Sustainability Plans.  Through this planning process, the allocation of the rights to withdraw groundwater will be defined within each GSA. Thus, being aware of and engaging in the GSA process could be vital to protecting and defining your groundwater rights.

In addition to the administrative filings described above, there are active adjudication processes occurring throughout Montana, northern Idaho, parts of New Mexico, and countless other areas across the western United States. At a high-level, adjudication means inventorying, investigating, and defining the rights to use water within a geographic area through the courts. Although the specific rules and procedures vary from state to state, adjudications typically involve a district or water court, the state engineer’s office, and water users throughout the basin. Within the adjudication process there are court-ordered deadlines to initially file on your water use. Once filed, there are ongoing deadlines throughout the adjudication process. Missing any of these deadlines can be fatal to the preservation and adjudication of your water rights.

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In addition to ensuring that your water right is properly filed and defined through adjudication, it is also important to continue the “beneficial use” of your water. As described in our previous article for this publication, water rights in the western United States are subject to the Doctrine of Abandonment, commonly referred to as “use it or lose it.”  While details vary from state to state, each prior appropriation state recognizes some form of the concept that, if water is not put to “beneficial use” for a certain period of time, the right to that water will be considered abandoned or forfeited.  Abandonment and forfeitures rules and regulations are intended to assure that water rights, a right to a valuable public resource, are not held for speculative purposes without being put to beneficial use.

Generally speaking, under the laws of prior appropriation states’ non-use alone does not cause a water right to be abandoned. “Intent” to abandon is also required. However, intent to abandon can be presumed after a long period of non-use. While some states allow for automatic abandonment after a period of time (also called “forfeiture”), most states require a court or administrative proceeding before abandonment occurs. However, long periods of non-use can shift the burden to a water right’s owner to demonstrate that there was no intent to abandon, which can be difficult to prove in a court or administrative proceeding.

A variety of actions can be used to show lack of intent to abandon a water right. The simplest protection is simply to use them when water is available in priority and can be put to beneficial use. For example, if you have an irrigation right, irrigate. If you have stock rights, watering livestock will keep the rights active. Using your rights will usually require maintenance of infrastructure such as diversionary headgates, cleaning out conveyance ditches, and repairing pumps and pipelines. Any of these activities and many others can be used to show lack of intent to abandon a water right. In contrast, one of the tell-tale signs of non-use and potential abandonment is a lack of working infrastructure. If infrastructure such as conveyance ditches have not been maintained and used for an extended period of time, this nonuse can be used to show abandonment of the water right. However, there may be other considerations to think through when putting water rights back into use after a long period of non-use, such as ditch easements.

Using your rights could also mean enforcing them against other users on the source. A senior water right holder has the right to make calls on junior water right holders on the same stream. This authority may also mean ensuring you use your rights at least periodically throughout the entire period of diversion. The need to utilize your rights each year and/or enforce your rights against other users on the source is very site specific, and in some circumstances, it may not be required to use water rights every year as long as they are used periodically when water is available.

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In addition to using your rights, measuring and documenting your use can be important.  If a water right is junior and water is not available, that fact should be documented by keeping records and photographs because lack of water can be a viable defense in an abandonment proceeding. If you have a recreational water right, you may want to document your enjoyment of the water resource by taking pictures. Or if you have a water right for fisheries use, you may want to hire a biologist to assess the fish population in your pond on a regular basis. With irrigation rights, installing a flume with a staff gauge in your ditch and then regularly measuring your diversions is a simple way to document your water use. Collecting and preserving your water use data can be important in defending your rights from claims of abandonment or forfeiture.

If you find that your operation has changed over the years and you no longer need your full water right, various options exist for protecting, preserving, and obtaining value for your “excess” water.  Perhaps you installed a pivot or drip irrigation system, thereby reducing your diversionary needs, or maybe there is a change regarding land usage which makes it difficult to utilize the full water right. Administrative options may include a change application to protect the reduced diversionary water as instream flow or it might be possible to change the place of use to another location and/or even change the type of use itself. Keep in mind, a change application may be limited to the actual and historic beneficial use. Therefore the “excess” water you are hoping to change must have been part of what was utilized historically in the operation.

Market-based opportunities may also exist, enabling water right holders to obtain value for their water assets. For example, within the Arizona Active Management Areas, if you have a certain type of groundwater right that you do not need, you can extinguish the groundwater right and turn it into an Extinguishment Credit (EC). The ECs can then be sold to and/or used by a municipal water provider to reduce groundwater usage fees. This process avoids annual reporting requirements for the groundwater right holder and enables them to obtain monetary compensation for their valuable rights.

In Summary

These water use registration and annual reporting processes, especially court led adjudications, vary tremendously based on your location and type of water use. The opportunity to register your water use and define your rights may only occur once and could be a definitive determination of the extent of your water rights. Understanding the site-specific rules, regulations, and deadlines is important.  Once you have registered and defined your rights to use water, it is important to follow the general steps described above to keep your rights active. The hard truth is once a water right is determined to be abandoned, the right is lost forever. Our best advice to water right owners is to keep good records, open your mail, respond to notices you receive, and seek help when you are too busy or unaware of what filings are necessary.

Harvesting the Fruits of Tax Reform for Farm & Ranch

by Matthew A. Bryan, Sr., J.D., LL.M

There are more good changes than bad for farmers and ranchers with the new tax laws.  But, as you might expect from a Congressionally-operated farm, there are tares sown in with the wheat, so this paper will assess the good, the bad, and the as-yet uncertain.

Summary of Changes

The changes relevant to farming and ranching are to three main categories of the tax code: 1) Estate, Gift and Generation Skipping Tax, 2) Personal Income Tax, and 3) Corporate Income Tax.

Estate, Gift and Generation-Skipping Tax

The Good

1.   The exemption amount has doubled to $11.2 million for individuals and $22.4 million for married couples.  You can gift or bequeath up to those exemption amounts without paying the 40% federal estate/gift/GST tax.

2.   Additionally, beginning in 2018, you can gift $15,000 ($30,000 per married couple) to an unlimited number of recipients per year, without it counting against the above exemption amounts. That is a $1,000 per person per year, increase over the 2017 amount.

For example, a husband and wife rancher have 3 children, who each have 2 children of their own (9 gift recipients).  They could give $30,000 cash to each of their children and grandchildren per year without affecting their combined $22,400,000 exemption.  So, if they both died in an accident at the end of 2025, they could have  given  away  and/or bequeathed $24,290,000, free of the 40% estate and gift tax.

The Bad

1.   The high exemption amount ends at the end of 2025, after which it reverts to the current $5,000,000, indexed for inflation ($5,490,000/$10,980,000 in 2017).

The Uncertain

1.   What happens if you and your spouse gift $22.4 million in the next 7 years, but don’t die until 2026 or beyond? Will your estate have to write a check to the federal government for $4.96 million (40% of $12.4 million). The prevailing opinion is no, there’ll be a legislative fix for that.  But it is not 100% certain. What if you and your spouse gifted $22.4 million of farmland, stock and equipment? Would your donees have to sell the family farm to pay your estate tax bill after 2025?  It is almost certain that a regulation or a law will prevent that. But the “almost” part causes me to leave it in this category.

Personal Income Tax

The Good

1. The rate changes are a mix, but better for many, so I’ll include the chart here:

2018 PERSONAL INCOME TAX RATE CHART

Rate

Unmarried Individual,           Married Filing             Head of Household, Taxable Income Over          Jointly, Taxable           Taxable Income Over Income Over

10%

$0                                         $0                                         $0

12%

$9,525                                $19,050                               $13,600

22%

$38,700                               $77,400                               $51,800

24%

$82,500                              $165,000                              $82,500

32%

$157,500                             $315,000                             $157,500

35%

$200,000                             $400,000                             $200,000

37%

$500,000                             $600,000                             $500,000

 

There are still seven brackets. Based on the rates that would have been in effect for 2018, had there been no tax law change, and not accounting for deductions, unmarried individuals making $157,500 or less will be taxed at slightly lower rates. Those making between $157,500 and $426,700 will be taxed at slightly higher rates. Above $426,700 will be taxed at a lower rate, because the top rate has come down.

2.  The standard deduction has been raised to $12,000 (Individual), $24,000 (MFJ), and $12,000 (HOH). That’s roughly double.

3.    The Child Tax Credit doubles to $2,000 ($1,400 refundable), with phase-out beginning at $400,000 for those Married Filing Jointly.

4.   Expanded use of 529 plan funds.

5.   The Obamacare Penalty is reduced to $0 beginning in 2019.

The Bad

1.   The marriage penalty is retained, though applicable to a smaller percentage of taxpayers. And some higher earners will pay higher rates, especially if they are not able to take advantage of other provisions of the tax laws. For instance, someone earning a good salary as a W-2 employee may pay more than someone earning more than them through their own pass-through business.

2.   The personal exemption has been repealed, which reduces the benefit of the higher standard deduction.

3.   Long-term Capital Gains tax rates were not adjusted, so the calculations are a little more complicated, since they don’t align with the new brackets.  It isn’t really worse; it just isn’t better.

4.   3.8% Net Investment Tax remains unchanged.  It should go away if Congress can get on with repealing Obamacare.

5.   State and Local Tax (SALT) deduction cap of $10,000.  If you live in a high tax state, this is not good for you.  Or perhaps you maintain residency in a state with an obnoxious long- arm.    Expect those states to fight back somehow. If you are in a low tax jurisdiction, this is not a bad development, unless you like to subsidize residents of New York City and L.A..

6.   There are still seven brackets, and the income tax is still a progressive income tax, meaning productivity is progressively discouraged by your federal government.  It prefers dependent subjects.

7.   529 Plan extended use of funds fails to cover homeschool expenses.   Homeschool families already pay for their children’s educations, as well as others, so to further penalize those who arguably are doing the most to educate future generations makes no sense (many farmers and ranchers homeschool).

8.   Mortgage interest deduction limit drops down by a quarter of a million dollars for loans originating after December 15, 2017.  Loans originating prior to this date are grandfathered. This applies to residential mortgage interest. Interest on home equity debt is no longer deductible at all.

9.   The “Obamacare Penalty” remains in effect for 2017 and 2018.

The Uncertain

1.   The effect on charitable giving is expected to be negative.  Most of us give because we believe in the cause, but sometimes gifts are given specifically because someone (or some entity) needs to reduce their income level, and so they go looking for a worthwhile charity to benefit.  With a reduced incentive to itemize deductions, many tax policy wonks project lower charitable giving.  I hope not.

Corporate Income Tax

The Good

1.  The corporate income tax rate has been changed to a flat rate of 21%.   This is a “permanent” change (which means it won’t change until/unless Congress takes some affirmative action to alter it; it does not automatically sunset in a few years, in other words).

2.  The expense deduction available under Section 179 for equipment purchases is doubled from $500,000 to $1,000,000. This change is not scheduled to sunset. The deduction cannot exceed taxable income.

3. Bonus depreciation under Section 168 has increased to 100% until the end of 2022, after which it is phased out. There has been some shuffling of the property subject to these provisions, a detailed explanation which lies outside this article’s scope.  Most of the usual ranch equipment will qualify, and it can be used equipment, as long as it is “new to you.”  As long as you aren’t buying it back from someone you sold it to, in other words.

4.  The application of Section 179 expensing and Section 168 bonus depreciation can also have a positive impact on Section 1245 recapture, resulting in lower Schedule F income, and lower self-employment tax.

5.  Section 199A Qualified Business Income deduction of 20%.  If you are the owner of a pass-through entity, like the Department of Agriculture says 85% of farmers and ranchers are, then you get a 20% deduction on your income from that business. There are limitations and carve-outs, but most ranchers who are pass-through entity owners (sole proprietor, LLC taxed as partnership or s-corp, partnership, s-corp) should benefit from this. This deduction is available  to businesses owned in trust, as well. The deduction may also be carried forward if there is a loss.

6.  Meals provided on-site will be 50% deductible.

7.  Corporate Alternative Minimum Tax has been repealed.

8.  Wind and solar credits remain in place.

The Bad

1.  The corporate income tax rate has been changed to a flat rate of 21%, which means that if you were taxed as a C corp, and were in the 15% bracket, your corporate tax rate just increased by 6%.

2.  Like-kind exchange treatment is no longer available for personal property (cattle, equipment, for example). It is still available for real estate. This means that if you exchange personal property, it will be a taxable event, even if no cash changes hands. For most, the changes to Section 179, and the bonus depreciation will be able to absorb this additional tax liability.

3.  Bonus depreciation phases out. After 2022, it phases out 20% per year, down to 0% bonus depreciation for purchases after 2026.

4.  If you are depending on government programs for future retirement income, lowering your self-employment tax now will also lower the amount you receive in future retirement income from the government. I know, I know, don’t laugh. I just had to mention that this is a result of taking advantage of expensing and bonus depreciation incentives.

5.  Section 199A 20% QBI deduction goes away at the end of 2025. There are other limitations which will not usually limit most ranchers, but may limit the ability to include certain income streams as QBI.

The Uncertain

1. There are some gaps in the law and regulations regarding property qualifying for bonus depreciation.  As with most new laws, these kinks will have to get worked out, and soon. Most of the uncertainty surrounds improvements to leaseholds. Typical equipment-type purchases should qualify. For other types, check back for updates.

2.  There is a glaring gap in the treatment of sales to Co-ops as opposed to sales to independent buyers, making sales to Co-ops considerably more attractive. This is actively being addressed, but the solution is still pending.

Conclusion

Please do not attempt self-service when it comes to tax planning. This area of the law is a minefield, and generally well worth the expense of paying for a knowledgeable guide. Congress is notoriously fickle, so it is advisable to take advantage of the new laws while they are in effect. As widely divergent as the policy goals of our nation’s leaders are, it is not realistic to expect stability in tax law beyond the next election cycle. Contact your tax adviser to discuss which, if any, of these strategies will work for you. The long-term success of your ranch could be significantly impacted depending upon your proactive steps now. To read the “Strategies to Consider” section of this article please click HERE.

 

Great Father’s Day Message from Our Friends at Stetson

With Father’s Day around the corner, it is our pleasure to share this post from Stetson. Our relationship with the Tom and Robin Green has evolved from prospect to client to close friends. This post represents what we wish for all our clients…a place for family with all the experiences that it entails.

Father’s Day in Bozeman, Montana – by Courtney Green

There is a humility and resilience developed through hard work. I grew up on a farm in northern Michigan watching my parents work tirelessly to build a life and keep our farm running. I remember when I was very little, walking out of my bedroom before dawn in the early Spring, and often seeing a new calf laying in the middle of the kitchen floor. The snow in the upper peninsula of Michigan makes Spring calving quite challenging, so if they needed help, the babies often ended up in the house to stay warm.

When your childhood starts that way, it is nearly impossible not to grow up with a certain respect, work ethic, and compassion for animals and the land on which they are raised.

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You grow up learning that you always do what needs to get done. That’s it. You do it, and you do it with respect, honesty, and not a little work ethic.
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We now live in Montana, not far from my parents working ranch just outside of Bozeman. My children have the opportunity to grow up hearing stories and learning life lessons that you don’t learn in school, and can’t be found on an ipad.
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There is a reverence and an appreciation for this place, cultivated through working hard and caring deeply for the animals and the land. They follow my dad everywhere on the ranch… on foot or horseback, fixing the fence, checking cattle, caring for horses, and of course, sneaking in time to play too. They are learning lessons and creating memories that run deeper than they know.
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Happy Fathers Day to all of the wonderful Fathers and Grandfathers out there. Especially mine.
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