What Is Tax Form 4835 for Farm Rental Income?

Form 4835, Farm Rental Income and Expenses, is a specific tax document used by landowners in the United States. It is designed for reporting farm rental income that is based on the production of crops or livestock by a tenant. This form applies when the landowner leases property to a farmer and the rent is paid in the form of a share of what the farm produces, rather than a fixed cash amount. The primary function of the form is to calculate the net income or loss from this type of rental arrangement.

This form is distinct from other rental income forms due to the nature of the payment. If a landowner rents out farmland for a flat cash rate, that income is reported on Schedule E. Form 4835 is exclusively for share-based rental agreements where the landowner’s income fluctuates with the farm’s output. It allows for reporting the income from selling these shares and the associated expenses.

Determining if You Should Use Form 4835

The decision to use Form 4835 hinges on a concept defined by the IRS as “material participation.” A landowner must use this form only if they do not materially participate in the farming operation. Material participation means being involved in the work or management of the farm in a way that is regular, continuous, and substantial. If a landowner does materially participate, they are considered to be operating a farm business and must report their income and expenses on Schedule F, Profit or Loss From Farming.

The IRS provides two main tests, and if you meet either test, you are considered to be materially participating. The first test is met if you have an arrangement with your tenant for your participation and you do three of the following four things:

• Pay at least half the direct costs of production.
• Furnish at least half the tools, equipment, and livestock.
• Advise and consult with the tenant periodically.
• Inspect the production activities periodically.

The second test for material participation is met if you regularly and frequently make, or take an important part in making, management decisions that substantially contribute to the success of the enterprise. This includes decisions about what to plant, when to sell, and which government programs to join. The distinction is between this type of active management and the more passive role of an owner who does not have final say in operational matters.

Information Required to Complete Form 4835

Before filling out Form 4835, you must gather all relevant financial records for the tax year to ensure accuracy. The necessary documents fall into two main categories: income and expenses. Having these organized beforehand will streamline the process of completing the form.

For income, you will need records of all revenue generated from your share of the farm’s production. This includes documentation showing the sale of crops or livestock. An important point is that income is recognized in the year the shares are converted to cash or its equivalent, not necessarily the year they are harvested. You should also collect any Forms 1099-PATR for cooperative distributions and Forms 1099-MISC that report payments like crop insurance proceeds or government agricultural program payments.

On the expense side, compile all receipts and statements for costs associated with the rental property. Common deductible expenses for a landowner include property taxes, mortgage interest paid to a financial institution, and property insurance premiums. You will also need records for repairs, conservation expenses, and any management fees paid.

How to Complete Form 4835

The form is structured into distinct parts to guide you through the calculation of your net farm rental income or loss. You will start by entering your name and Social Security Number at the top of the form.

Part I of the form is for reporting your Gross Farm Rental Income. You will enter the income received from the sale of livestock, grains, and other crops that you received as your rental share. Subsequent lines are for reporting other types of farm-related income, such as agricultural program payments, Commodity Credit Corporation (CCC) loans, and crop insurance proceeds. You will sum all these income sources to calculate your gross farm rental income.

Part II is where you will list your deductible expenses. The form provides specific lines for common expenses like car and truck expenses, insurance, interest, and real estate taxes. If you have expenses that do not fit into the predefined categories, you can list them on the line for “Other expenses.” After listing all expenses, you will total them.

The final step on the form is to calculate your net farm rental income or loss. This is done by subtracting your total expenses from your gross income. The result is entered on the final line and represents the amount you will report on your main tax return.

Reporting Form 4835 Income on Your Tax Return

After you have calculated the net farm rental income or loss on Form 4835, the net figure must be transferred to another form. The amount is reported on Schedule E (Form 1040), Supplemental Income and Loss, and you will enter this amount on line 40. Both the completed Form 4835 and Schedule E must be attached to your main tax return, Form 1040.

An important consequence of using Form 4835 is related to self-employment tax. Because the income is classified as rental income from an activity in which you did not materially participate, it is generally not subject to self-employment taxes for Social Security and Medicare. This is a significant difference from farm income reported on Schedule F, which is subject to self-employment tax.