In economic theory, a zero- sum game is a mathematical representation of a situation in which each participant’s gain or loss is exactly balanced by the losses or gains of the other participants.

Gambling is a common example of a zero-sum game since the sum of the amounts of the winning players equals the combined losses of the others.

There are examples of zero- sum game in agriculture (which may resemble gambling). For every winner, there is a loser to balance the day’s trade in the grain market at the board of trade.

Trying to value the family farm to accomplish the goals of separate parties is another example of a zero-sum game. The higher the price, the buyer loses and the seller wins. The lower the price, the buyer wins and the seller loses.

A mother’s dilemma

In one family example, the issue for a mother is that she is the mother of both the buyer and the seller. Is it possible to find balance so that neither of them win and neither lose?

Her husband had previously passed away, leaving land in trust. She has life income from the trust, but the remainder will go to their children at her death.

This is a popular plan that protects the assets in the trust from the potential creditors of the survivor (nursing home, administration, estate tax or remarriage). The husband’s land got a basis step up to $5,000 per acre at his death.

The mother has land in her own name that will be passed to the children at her death through her estate and will receive an adjusted basis at that time.

One daughter currently lives two states to the west. She is willing to sell her current home and make a substantial investment at her age and financial position to accomplish her lifelong dream of moving back to Iowa to own the family farm.

She is a believer in conservation and has a strong sense of family value. She told me that “whatever good has happened in my life can be traced directly back to the values learned on this family farm.”

Both the sister and the mother want to utilize the tenant house to benefit rural youth through their local church. It would appear that mother and daughter are like-minded. But they probably wouldn’t be in my office if all three parties were on the same page, so I expected resistance from somewhere.

The competing issue surfaced with the second sister from two states to the east. She is a highly compensated executive who has been extremely successful in buying and selling real estate over the years.

Striking a balance

Mom is now faced with the greatest balancing act facing our agricultural community.

Should she sell the land to one sister now on a contract (causing strife between her children) or should she hold onto the land until her death knowing that it will be auctioned (causing strife between her children)?

We discussed four possible options for mom to find her “price equilibrium” between the buyer and the seller:

  • Auction
  • Average of two appraisals
  • Discount off the average of two appraisals
  • Special Use Valuation

An auction is the ultimate in finding out what farm land is worth to your neighbors. For the past 10 years, land auctions in Iowa have garnered the highest prices of the options we discussed.

In certain communities, an auction might still be overheated. In other areas, there might be a no-sale without a bid. The assumption made in this particular area was that the auction price might be between $8,000 and $9,000/acre (depending on the day).

Land value

Appraisals are based on comparative land sales (usually auctions) in the area. Of course, there can be a range of value as opinions vary. In this case, we assumed that the average of 2 appraisals would come in at $8,000/acre for this land.

The concept of a discount is fascinating to me. The owner of land inherently understands that it is “overvalued” and may be willing to “discount” it to keep it in the family.

In a majority of discounts, we see a 25 percent discount off the average of two appraisals. Ironically, both Mom and Dad’s estate plans offered this 25 percent family discount (kids would pay less and get less than if it were sold to the neighbors).

If their land appraised at $8,000/acre, a 25 percent discount would bring the “family value” to $6,000/acre.

The Internal Revenue Code section 2032A provides for a calculation of farm land for estate tax purposes based off its best “use.” This code is designed to value farm land at production values if it stays in the family.

In this case, the formula is not to reduce estate tax, but rather a tested method to find a logical “family value” for land that is to stay in the family based on cash flow (not auction or appraisal).

The formula is: (5 years average rent) – (property tax) / interest rate.

If the average rent for the last five years based on Iowa State University average were $272/acre and property taxes were $30/acre and the interest rate for the formula were 4.91 percent, the “family value” based on 2032A would be = ($272 - $30) / 4.91% (or $4,982/acre).

Family agreement

Sometimes, if we look hard enough, we can find a way to turn lemons into lemonade. In this particular example, if Mom agrees to sell her land at $4,982/acre, this would trigger a capital gain of $3,982/acre (her personal land has a basis of $1,000/acre).

If the trust sells the trust land for $4,982/acre to the sister, there would be no gain.

Wouldn’t it be awesome if they made a family agreement on the trust land at $4,982/acre to the sister, then the sister could trade parcels with Mom? The sister could wind up with mom’s land after the trade with the trust basis (without tax) and the mom could wind up with the trust land with her own basis to be distributed by her estate.

This type of transaction requires careful tax planning by your accountant and attorney to make sure it meets rules for exchanging between family members, but it just might be worth a look.

Mom’s hope is to find a balance between the buyer (winner/loser) and the seller (loser/winner) in their zero-sum game. At some price, the winner becomes the loser and the loser becomes the winner. The transition point is where we sometimes find “fair” in a family farm transaction.

My sincere hope is that neither of them will be winners and neither of them will be losers. Rather, they both might realize their mother is trying her best to find balance while leaving a legacy that won’t be so much the value of her estate, but rather a way of living that might possibly continue to shape lives in her rural community.


For 26 years, Steve Bohr has been a partner in the farm continuation firm of Farm Financial Strategies, Inc. For additional information on farm continuation issues or if you have a question please contact Steve via email at Bohr@FarmEstate.com or by phone at 1-800-375-4180.

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