Does land HAVE to be in LLC

[Steve]

We are thinking of buying 40 acres of vacant land.  It is close to the city, and the thought is that for the next few years we would leave it empty and just use it for fun (hunting, etc) and perhaps have a farmer keep some cows on it and perhaps produce some hay.  So there would be some expenses related to farming and some income, but this would be low.

Then at some point we would build a house out there and move there, but maybe not even until the kids are gone to college.  It is still close enough to commute to my hospital.

Do we have to create an LLC and put the title within this?  My homeowner's insurance will cover it if not being farmed, and if it is being farmed, we can get a farm and home policy on it.  And my umbrella insurance will provide $2 million in additional liability coverage on this property.  So I'm not really worried about liability since that seems well covered.  Is an LLC needed for tax reasons or any other reason?  I can still take the typical deductions on the farm expenses without an LLC, correct?

[The White Coat Investor]

You obviously don't have to. It really comes down to how much internal liability you think it could cause you. That's the main purpose of the LLC.

It won't help with taxes. Since this will be passive income anyway, there's no savings on payroll taxes by forming an LLC and taking the S election (i.e. taxed as an S Corp).

[jfoxcpacfp]

No, you will have no different tax deductions with or without the LLC (except for the cost of setting up and maintaining the LLC). It would be less expensive and simpler to simply raise your umbrella policy by another million.

Fwiw, it would be pretty unusual to form an s-corp for land. The general rule is to never put appreciating property inside a corporation (including s-corps), typically real estate or even equities. The reason is that you will pay income taxes on any growth if you distribute the property to yourself or another entity, even if you do not sell it. So, if you used an s-corp to hold the land, then you would have to pay income taxes on the increase in value when you take the land out to build your residence.

I really recommend you work with a CPA on this if you plan on using the land for farming operations and reporting on schedule F or form 4835.