The University of Nebraska has developed the following overview of the advantages and disadvantages:

Advantages of Cash Rent:

• Less (perhaps none) landlord managerial input is required than with other leasing arrangements.  The tenant is allowed a relatively free hand in making management decisions.

• Reduced involvement decreases the possibility of friction between the landlord and tenant concerning management decisions.

• Concern about accurate division of crops and expenses is reduced or eliminated.

• The landlord does not have to handle the marketing of crops.  However, the landlord will not receive additional profits due to high yields or prices.

• Fixed cash rent lessens the landlord's concern about variations in prices and yields.  The tenant bears all prices, cost, and production risks.

Disadvantages of Cash Rent:

• A cash-rent amount acceptable to both parties can be difficult to determine.

• Once a cash-rent is set, a change in the rental rate may be difficult to negotiate in response to changes in prices and costs.

• In average or above-average years, the landlord may receive less net income than from crop-share rents.  However, additional profits due to high yields or prices will not occur.

• The landlord has fewer opportunities for income tax management.  Under a share arrangement and cash reporting of taxable income, the amount of taxable income can be shifted some through timing or crop sales before or after the end of the year.  Similarly, purchase of fertilizer and seed for the next growing season can be made in the closing months of any tax year to reduce taxable income.

• There may be an increased danger that tenant will "mine" the land.  However, competition for land and appropriate requirements in a written lease can minimize this problem.

• The landlord has little opportunity to build a base for Social Security payments due to the difficulty in establishing acceptable evidence of material participation.  This may not be a concern to retired landlords.

• The tenant assumes risk from price and yield variations.

• To value the farmland in the landlord's estate at its use value rather than its fair-market value for estate tax purposes, the following two requirements must be met:  1) Before the landlord dies, a cash-rent lease can only be to a member of the landlord's family as the tenant.  2)  After death, the heirs must not cash lease the use-value land; not even to a family member.

• Eligibility for paying federal estate tax in installments over 15 years after death could be jeopardized.  Land rented through a cash-rent lease does not constitute an interest in a closely held business, which the decedent must have at the time of death to be eligible to pay federal estate tax in installments.  Only crop-share or livestock-share leases qualify as interest in a closely held business.

Advantages of Crop-share Arrangements

• Compared to cash rents, less operating capital may be "tied up" by the tenant due to the landlord sharing costs.

• Management may be shared between an experienced landlord and tenant, resulting in more effective decisions.

• Sales of crops may be timed for tax management.  Likewise, purchased inputs may be timed to shift expenses for tax purposes.

• Risks due to low yields or prices, as well as profits from high yields or prices, are shared between the two parties.

Unlike cash leases, a "Material Participation" crop- or livestock-share lease satisfies the pre-death qualified use or "equity intent" test requirement for special-use valuation for federal estate tax purposes.  A crop- or livestock-share lease does not satisfy all pre-death eligibility requirements.  A cash-rent lease will not work.  Also, the landlord may build a Social Security base through "material participation."¹

Disadvantages of Crop-share Arrangements

• Landlord's income will be variable because of yield and price variation and changes in shared production-input costs.  This may be a particularly important concern for landlords in retirement.

• Accounting for shared expenses must be maintained.

• The landlord must make marketing decisions, except for nonmaterial participation crop-share leases.

• The need for tenant and landlord to discuss annual cropping practices and to make joint management decisions is greater.

• As prices or technology change, the lease should be reviewed for fairness.  Sharing arrangements may need to be changed.

• A "material participation" crop- or livestock-share lease may reduce Social Security benefits in retirement.¹

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¹ Crop share rental income is excluded from self-employment income unless the landlord "materially participates" in the production of agricultural product or production management.  Material participation is necessary to build a Social Security base and may be necessary if special use valuation is to be used for federal estate tax purposes.  However, material participation may cause Social Security payments to be decreased for persons eligible for social Security payments.

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