Below market rent on farm land

[DoNTaxesNow]

Older client has 1200+ acres of farm land for which she signed an agreement to sell at market value to an unrelated party... her children did not want mom to sell the land... not sure mom was fully understanding the situation at the time (this is a seperate legal issue).
Rather than force the sale per agreement, the "buyer" has offered to rent the land at 25% of market rate for 3 years, then at full market rate for next 7 years, and then buy the land at the future market value after those 10 years.
The question is weather the discounted rental rate is considered a gift? The annual value of the discount is over $30K. Anyone have a code section, or case law to refer to?
Thank you.

[JG EA]

I would say that if a sales agreement was in force it would be an installment sale.

If a sales agreement was not in force she can rent it for whatever she likes, but can take no expenses (besides what normally be taken i.e. taxes).

[Burke]

Assuming he agrees to nullify the original contract (which should be done in writing by both parties, given the situation you describe), then he can sign a new one, which could be a lease with an option to buy. Only the purchase price will be decided in the future. It can be rented at any amount that is agreed upon since it appears it is land only, no depreciation of structures(?), and the only deduction for the owner would be the real estate taxes, which would be deductible anyway. The rent would be income to the owner. This would not be treated as a gift.

[DoNTaxesNow]

Thanks JG & Burke - I believe the plan is to nullify or amend the original agreement to allow for the lease terms. There was some concern that the deeply discounted rent could be construed as a gift, and require gift tax returns to be filed. Also questioned if the discount could be considered a settelment payment to avoid the forced sale?
My first thought agreed with you that the rent could be any amount agreed upon, and my client will simply have 75% less rental income for the next 3 years.

[Burke]

For clarity on those matters, I would strongly suggest terminating the original contract and making up a new one, rather than trying to amend it.

[Snaggletooth]

Lease-Purchase

I believe if the buyer is not willing to rescind the original contract, the entire multiple transactions be treated as a lease-purchase.

This measures the principle by discounting all future payments into their present value. The future payments are rents, downpayments, future purchase dollars, etc.

The sale is reportable by the selling party in the year of the sale, and measures interest vis-a-vis the discounted rate. Interest reported with this convention is reported as current interest income in the year received. The selling party measures the gain by subtracting her basis from the present value calculated above. She has the option of reporting on the installment basis each year principle is received. (Principle payments are separated from the interest as described above)

If the buyer is willing to rescind the original contract, then the treatment is dependent upon the new deal, as if the former had never existed.