Buyer's Guide

Vineyard owners can deduct ordinary and necessary expenses as farm/business expenses as long as they can provide intention to make a profit. A wide variety of farming-specific and other operational and administrative costs qualify as ordinary and necessary farming expenses. In addition, agricultural businesses have many special deductions not allowed for other businesses.

Vineyards often have significant investments in various types of assets (real estate, farm equipment and machinery, vineyard development, etc.) Specific to the growing of grapes, there can be significant investments in trellis and irrigation systems, rootstock and vines, fences, roads, wells, drainage, etc. The IRS has many methods for depreciating property, some of which can create significant tax breaks. IRS Code Section 179 accelerated depreciation and Section 168K bonus depreciation are examples of depreciation advantages that could be available. However, be advised that the State of California has different tax rules and does not necessarily conform to IRS depreciation methods.

if deductible expenses are more than income for the year, the vineyard owner can create an NOL. NOLs can be carried back two years or carried forward for 20 years. Therefore, it may be possible to carry back farming loss in order to receive a refund of taxes paid in previous years. An NOL (that is not elected to be carried back) can be carried forward in order to offset future income. In addition, previous IRS rules allowed for the carry back of farming losses up to 5 years previous. While this carryback provision is no longer applicable, it shows some of the previous benefits that the farming industry has received from the IRS. However, be advised that the state of California does not necessarily conform to IRS NOL rules.

certain small vineyard owners could qualify to use the cash method of accounting instead of the accrual method, which could create tax opportunities.

due to the capital investment sometimes necessary in vineyard activities, vineyards could have considerable real estate holdings to borrow against.

expenses encountered for soil and water conversation required by government agencies, as well as to protect endangered species, can be deducted and not capitalized.

many growers who can’t use the cash method are still able to currently deduct post-harvest and pre-bud break costs.

while land costs normally cannot be depreciated or amortized, there is a provision specific to the growing of grapes whereby it may be possible to segregate out the right to use an AVA Designation as an intangible asset subject to amortization.

if a taxpayer qualifies as a farmer, they could be subject o more favorable rules in regards to the payment of estimated taxes.

certain farmers are able to elect to use farm income averaging – the ability to average some or all of the current year’s farm income by spreading it out over the past three years.

some farmers may be able to claim a tax credit or refund of federal excise taxes on fuel used for farming purposes.

Significantly reduced property taxes for qualifying properties.

Farm equipment, machinery and more.

under Tax Code Section 197. This process requires a qualified accountant and appraiser. A sophisticated and under-utilized approach to tax planning is an American Viticultural Area (AVA) 15-year amortization under Tax Code Section 197. This process requires a qualified accountant and appraiser who have experience with the amortization of AVAs. 

When a vineyard is purchased (within an AVA), a portion of the purchase price allocation can be defined as intangible AVA value. For 197 purposes, the right to use an AVA designation is a license, permit, or other right granted by a governmental unit and is not an interest in land. Therefore, the right to use an AVA designation and a portion of the vineyard’s purchase price can be amortizable. 

An interest in land is not a 197 intangible. However, the AVA designation applies to one of the uses of a particular crop from any land within the designated AVA, which is further processed into a finished product. 

The national office of the IRS released a Chief Counsel Memorandum (CCM) concluding: The right to use an AVA designation is a 197 intangible and the amount of the vineyard's purchase price allocated by Taxpayer to the right to use the AVA designation is an amortizable 197 intangible.

The first step in claiming a deduction for an AVA is determining the value of the AVA. A competent, well-supported valuation is an important part of supporting the value allocated to an acquired AVA and the corresponding amortization deduction. The good news is that for those who have acquired vineyards and did not assign value to an AVA, an automatic change in method of accounting is available.

With the help of experts, my clients and other vineyard owners have successfully claimed amortization for AVAs. I cannot give recent valuations or provide estimates (I am not an ASFMRA Appraiser), but I can warrant that the value of this technique is tremendous. Even in outlying AVAs without AVA-designated brands, I have seen significant price allocations.

Pricing depends on location, improvements, water, vineyard quality, contracts, permitted uses, infrastructure, and realistic operating potential. Simple price-per-acre comparisons rarely tell the full story.

Start with a general understanding, then go deeper once you are in contract. Sellers usually do not release sensitive information until there is a committed buyer and an escrow process underway.

Buyers should review title, water, zoning, permits, vineyard condition, yield history, block data, contracts, infrastructure, environmental issues, inspections, and operating costs. A vineyard purchase is often both a real estate decision and an operating-asset decision.

Common sources include wells, reservoirs, ponds, riparian rights, district water, municipal water, or blended systems. On the Central Coast, water reliability and basin-specific rules can be critical.

Sometimes. Buyers should request records supporting the legal basis for the water source, including well records, agreements, easements, water-right documentation, and reporting history.

Important items may include well logs, flow tests, water quality reports, storage capacity, irrigation maps, shared water agreements, system diagrams, and any required reporting. Water is one of the most important parts of vineyard due diligence.

Look at vine health, varietals, rootstock, vine age, spacing, trellis systems, yields, farming history, and likely replant timing. Not every planted acre contributes equal value.

Very important. Buyers should review several years of yield and quality history, along with the reasons behind strong or weak performance.

Investigate red blotch, nematodes, fungal issues, trunk disease, phylloxera risk, pesticide use history, and testing reports. Vine health can materially affect value and future capital needs.

Buyers should understand labor, materials, irrigation, management, machine work, harvest costs, and replacement needs. A beautiful property can still require significant ongoing investment.

It depends. On the Central Coast, many smaller vineyard properties are driven by lifestyle, land value, and tax strategy versus operating profit. Buyers should underwrite conservatively.

That depends on row spacing, slope, access, trellis design, turnaround space, and block layout. Mechanical compatibility can have a major effect on labor costs.

Buyers should verify what is currently allowed and what may require future approvals. Assumptions about wineries, tasting rooms, events, lodging, or expansion should always be confirmed.

Not always. Some approvals run with the property, while others include conditions, review triggers, or operator-specific limitations.

Yes. Review potential issues such as creeks, wetlands, erosion, grading history, habitat concerns, code enforcement, recorded restrictions, and possible water contamination before removing contingencies.

Depending on the property, buyers may need home, building, septic, well, irrigation, soil, vineyard virus, trellis/fence, acreage, and natural hazard inspections or reports. Every property is different.

Key items include roads, bridges, wells, pumps, electrical service, storage tanks, reservoirs, fencing, agricultural buildings, winery improvements, and residences. Deferred maintenance can become expensive quickly.

That depends on the terms. Buyers should review assignment rights, termination provisions, obligations, and whether the arrangement makes sense after closing.

Review bonded status, licenses, use permits, production limits, wastewater handling, equipment condition, and compliance history. Existing facilities are not always turnkey.

Items that are attached to and part of the real property may transfer with the sale. Significant equipment or business assets may require a separate process and bulk sale escrow outside the real estate transaction. Buyers should confirm exactly what is included early.