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Using a Contract for Deed to Transfer the Family Farm to the Next GenerationIf you’ve been thinking about selling your farm to your farming heir on a contract for deed, you’re not alone. We see this strategy used every day by family farmers who want to transition land to the next generation while still creating reliable retirement income. When structured correctly, a contract for deed can be a powerful tool in a farm succession plan. When done poorly, it can create financial stress, family tension, and estate tax surprises.
At Wagner Oehler, we work with family farmers every single day to help them pass the farm on to the next generation. We’ve been helping Minnesota farm families do this for more than 50 years. One of the most common tools we use in farm succession planning is the contract for deed—but it only works when it’s intentionally designed to fit the bigger picture.
A contract for deed can be a relatively simple and immediate way to reward sweat equity and move land into the hands of the farming heir while still providing income for the parents. Unlike a traditional sale, it allows flexibility. Payments can be tailored to what the farm can realistically afford, and ownership equity builds over time rather than requiring full financing upfront.
What often surprises families is that the price of the farm is usually not the primary concern. Most parents are far more focused on whether the payment will be affordable for the farming heir and dependable enough to support retirement. That means we start by looking at cash flow, not fair market value.
If the heir has been renting the land, we look at what they’ve been paying and how the operation has performed. We also examine whether the heir has off-farm income or whether the farm must fully support them. If the farm is the sole source of income, then the farm itself has to be able to pay for the land. When you run those numbers honestly, you quickly discover that selling at full market value often doesn’t work.
In many cases, we increase payments above historical rent levels to reflect the fact that the heir is now building equity rather than simply paying rent. For example, if rent was $15,000 per year, the contract payment might be $30,000 or $40,000 annually. That higher payment reflects ownership value while still staying within the farm’s financial limits.
At the same time, parents only get one chance to sell the farm. You can always adjust rent or lease to someone else, but once you sell the land, it’s sold. That’s why it’s critical not to discount the price so heavily that you jeopardize your own retirement security. The goal is balance—fair to the farming heir, sustainable for the farm, and sufficient for the sellers.
Once we settle on a payment amount, we can work backward to determine the purchase price. But payment alone isn’t enough. The interest rate matters, too.
When land is sold to a family member, the IRS requires that interest be charged. We’re not allowed to sell land at zero percent interest. Instead, we use the Applicable Federal Rate, commonly called the AFR. The IRS publishes this rate monthly, and we simply use the rate in effect during the month of closing.
Most farm contracts use the long-term AFR. In early 2026, that rate has been hovering around 4.5%, although it changes over time. Once we know the payment amount, interest rate, and term—whether that’s 20 years or 30 years—we can run an amortization schedule and determine the final purchase price.
This is often the moment when families realize the contract price will be significantly lower than fair market value. It’s not unusual to see a farm worth over a million dollars sold for $500,000 or $550,000 in order to make the numbers work. That discount is not a mistake. It’s a deliberate part of making the farm transition viable.
When land is sold for less than fair market value, the difference is considered a gift under federal tax law. If a million-dollar farm is sold for $550,000, the $450,000 discount is a reportable gift. That doesn’t mean gift tax is owed.
As of January 1, 2026, the federal gift and estate tax exemption is $15 million. Unless you’ve already used most of that exemption during your lifetime, a gift of this size will not result in federal gift tax. The key is reporting it properly.
Minnesota does not have a gift tax, but it does have a three-year lookback rule. If you die within three years of making the gift, the gifted amount is pulled back into your Minnesota taxable estate. After three years, only the remaining contract balance is included, not the land’s original fair market value. This distinction becomes critical in long-term planning.
Even if a contract is amortized over 20 or 30 years, that doesn’t mean it has to run that long. Many families choose to include balloon payments or triggers. A five-, seven-, or ten-year balloon can require refinancing or renegotiation down the road. Some contracts include provisions that require payoff after the seller’s death, though these must be drafted carefully to avoid creating impossible obligations for the heir.
Why include these triggers? Because the seller’s interest in the contract for deed is still part of the estate. If there’s a remaining balance at death, that balance can be used to fund inheritances for non-farming heirs. For example, if $200,000 remains due, that amount can pass through a trust to children who are not involved in the farm, helping create fairness without breaking up land.
A contract for deed is not just a real estate document. The seller’s interest is property, just like land or cash, and it must be integrated into a comprehensive estate plan. In most cases, we place the seller’s interest into a trust. That way, payments continue if the seller becomes incapacitated, and the contract is administered smoothly after death according to the family’s wishes.
The buyer’s estate plan matters too. Once the farming heir becomes a buyer under a contract for deed, their balance sheet changes dramatically. They now have equity, debt, and legal obligations tied to the land. Even young farmers without children need at least a basic estate plan so someone can step in and manage the contract if something unexpected happens.
This is why contracts for deed are something we work with all the time at Wagner Oehler. When done right, they are not just transactions—they are long-term succession tools that support the farm, the family, and the next generation.
To learn more about farm succession and estate planning, keep an eye on our Events page located at: https://www.wagnerlegalmn.com/events/ and visit Farm Lawyer.
If you’re ready to start being proactive about your estate plan, contact us to get started.
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