People talk about the “1%” as if it was something of the outer world. It is assumed to be a small cadre of individuals with seemingly infinite wealth who live in the economic stratosphere. This is not actually the case.

In 2024, there were only 813 billionaires in the United States. These people are the ones we often think of when we think of the “1%.” However, because there are 340 million people in the United States there are 3.4 million people in the “1%.” If you took away the 813 billionaires in the United States, there are still 3.4 million non-billionaire people in the “1%.” Almost all of us know some of them.

According to Investopedia, the minimum net worth to be among the “1%” was $13.7 million in 2023. This essay looks at one possible journey into this cohort. It starts with a simple model of farmland acquisition initiated by an inheritance. It shows how, over the course of 30 years, this can provide entrance into the “1%.” It concludes with some insights into the results of the process illustrated.

The Situation – Inheriting the Average Iowa Farm

Assume that one inherited an average Iowa farm in 1992. It consisted of 325 acres valued at $2,559 per acre in 2022-equivalent dollars. It was inherited it complete with the equipment and facilities required for operation. Assume it was inherited free and clear. It was paid off, and any inheritance and estate taxes and any other transfer costs were covered by the previous owner’s life insurance or a cash component in the estate. As a result, one acquired real estate (farmland) assets valued at $831,643 in 2022-equivalent dollars. (Some calculations may not be exact due to slight rounding errors in the presentation.)

We can build a model of the land value account of this operation utilizing publicly available data:

• Number of farms, land in farms, and average farm sizes from the United States Department of Agriculture
• Average Iowa farmland values per acre from Iowa State University
• Average Iowa ag land rents per acre from the United States Department of Agriculture
• Farm income and government payments information from the United States Bureau of Economic Analysis

The model is driven by land value appreciation and rental income (savings) per owned acre. Beyond the initial inheritance, additional land acquisitions are entirely funded by either capitalizing land value appreciation or in the form of cash purchases supported by accrued rental income (savings) in excess of mortgage payment needs. The amount of land value appreciation that can be capitalized is limited by the availability of rental income (savings) to fund mortgage payments. All dollar-denominated data is adjusted to 2022-dollar equivalents to facilitate comparisons and trends.

The rules to the model are listed below:

1. The land value account is isolated from other income. Land acquisition is supported by nothing other than the value appreciation and rental income (savings) generated by the initial 325-acre inheritance.
2. Rental income (savings) must be sufficient to cover mortgage payments at the time of any purchase or refinance.
3. Land can be purchased on terms of 40 percent down, 7.5 percent interest, and 20-year amortization with payments once a year throughout the period modeled.
4. The land is inherited in 1992, the first year in which we have complete single-source data.
5. The model runs through 2022, the last year in which we have complete data from the same sources.
6. The unencumbered value of the initial inheritance is utilized as collateral to purchase as much land as possible in 1993.
7. Following 1993, land is purchased and/or debt is refinanced every five years to whatever extent land value appreciation and rental income (savings) supports under the assumptions above.
8. At purchase points, accrued surplus rental income (savings) over mortgage payments is used to purchase land for cash as long as total purchases (cash and amortizations) total 10 acres or more.
9. Farm operating income and expenses, including property taxes are ignored.

From 1992 to 2022, the average acre of Iowa farmland appreciated at an average of $282.75 per acre per year in 2022-equivalent dollars. Over the same period, average farmland rents increased from $182 per acre to $256 (reaching a peak of $314 in 2014). These increases varied from year to year but have been significant over time. This farmland appreciation and increasing rental value provides significant leverage to increase wealth.

The table below presents the major items of interest. It covers the starting point (1992), the ending point (2022), and the purchase points throughout the period (1993, 1998, 2003, 2008, 2013, and 2018).

Our inheritor inherited 325 acres in 1992. It was valued at $831,643 and was free and clear. There were no loan or loan payments. At 1992 rental rates, it generated $59,006 in rental income (if rented out) or rental savings (if farmed by the inheritor) annually.

In 1993, the inherited acreage was fully leveraged to purchase an additional 491 acres. Our inheritor then had land assets of $2,070,614 and a mortgage of $1,246,158. Expected rental income (savings) of $150,175 annually is more than enough to cover the mortgage payment of $122,238. Any surplus of rental income (savings) over mortgage payments is accumulated. If sufficient, it is used for cash purchases of land at subsequent five-year transaction points. Any future appreciation in land values is capitalized at five-year transaction points to purchase more land up to the point where expected rental income (savings) is sufficient to cover mortgage payments.

Our inheritor will continue to make land purchases with capitalized appreciation and excess cash every five years to the extent possible. In 2013, the final land purchase is made. At that point, land holdings are 2,132 acres. This is 656 percent of the initial inheritance of 325 acres. In terms of dollar values, 2013 holdings are worth $22,934,292. This is 2,758 percent of the original inherited value of $831,643.

Land value increased substantially more than acreage because we constrained our mortgage obligations to levels where expected rental income (savings) could cover mortgage payments. Land values increased significantly faster than rental rates, so our inheritor was not able to capitalize a significant portion of land value appreciation. Had the inheritor faced lower interest rates or longer mortgage terms, it would have been possible to accumulate significantly more land and generate a significantly higher net worth.

In 2013, the land value account has a net worth of over $16 million. That is well over the $13.7 million needed to be a member of the “1%” in 2023. It took only 20 years of land value appreciation and rental income (savings) to raise a 325-acre inheritance to the “1%” level.

Land values hit a peak in 2013 and fell through 2018. Rental rates also fell. As a result, our inheritor could not purchase land in 2018. In fact, falling rental rates were insufficient to service the existing mortgage, so property needed to be refinanced in 2018 in order to spread remaining debt and lower payments to rent-serviceable levels. Refinancing was possible under model rules, but, unfortunately, net land value fell below $12 million.

By 2022, land valuations had recovered, but rental rates had continued to fall. This increased net worth but decreased the level of mortgage payments rental income (savings) could support. It is assumed that 2023 (which is just beyond the model) will require another refinance to spread remaining debt obligations and lower payments to a rent-supportable level. The net worth of the land value account is over $18 million. That put our inheritor solidly back into the “1%.”

It should be noted that there is nothing here about farming the land. Our inheritor could have rented the entire accumulated acreage out. While not of interest here, farming the land – no matter who farmed it – would have generated average of

• $54.75 per acre per year in direct government payments
• $120.72 per acre per year in operating income
• $175.47 per acre per year in total farming income

Over the period from 1992 to 2022, farming these holdings would have generated a total of nearly $9 million. That would have averaged nearly $300,000 per year.

Things to think about

There are several things going on, here. First and foremost, these things are not at all unique to the farming industry. Ag land was used in the example because existing historical data makes it easy to consistently separate asset values and incomes from operational incomes in farming. The asset-value accumulations and the inheritance value advantages illustrated here are common across nearly all industries in the United States.

Contrasting Purchase to Inheritance

In the example above, we closed off the land value account from all other sources of funds. The acquisition process was initiated by the inheritance of 325 acres of unencumbered land. That inheritance was critical to the land value accumulation observed.

Suppose someone wanted to initiate this process by buying 325 acres of land on the same credit terms outlined above. That purchase would require collateral. Suppose that collateral was in the form of an unsecured loan at 7.5% interest (the same interest used in amortization throughout this analysis). We would initiate the model with

• 325 acres of land in 1992
• $831,643 in land value
• $498,986 in a bank mortgage with payments of $48,947 annually
• $332,657 in unsecured debt

Whereas our inherited land in the example above was unencumbered and could immediately by leveraged to purchase more land, the land purchased here is completely leveraged and cannot support any additional purchases.

Because the land value account is closed, we consider the unsecured debt as an obligation that must be retired before additional land can be purchased. Funds for this can be acquired in two manners:

1. Land value appreciation can be capitalized to pay the unsecured debt. In effect, this trades increased mortgage balances for decreased unsecured balances. This is limited by both the amount of land value appreciation and the amount of mortgage payments that can be supported by rental income (savings).
2. Increases in rental income (savings) generate surplus cash that can be used to pay off the unsecured debt.

In 1998, 2003, and 2008, increased rental income (savings) is used to restructure the bank mortgage, capitalizing all the land value appreciation that rental income (savings) can service as mortgage payments. The entire value of this increased mortgage in each period is utilized to buy down the unsecured debt. There are no additional funds for land acquisition.

Restructuring in 2013 is sufficient to completely clear the remaining unsecured debt and to purchase an additional 27 acres of land. This is the only land acquisition that will be made in this scenario. As in the discussion above, land valuations and rental values fell from 2013 to 2018. In 2018, mortgage debt had to be refinanced to spread remaining debt and lower payments to a level supportable by rental income (savings). Rental values continued to fall through 2022. It is assumed that mortgage debt will have to be restructured again in 2023 (which is beyond the model) to lower payments so they can be supported by rental income (savings).

At the end of the model period, our purchaser has

• 352 acres of land, versus 2,132 acres accumulated by our inheritor
• $3 million net worth in the land value account, versus $18 million accumulated by our inheritor

Recall that, in both scenarios, the land value account is closed. It is driven by land value appreciation and market rental rates regardless of whether our owner farms the land or rents it out. Had our land purchaser farmed these acres, it would have generated $1.77 million in farm income over the period, or an average of almost $59,000 per year. Our inheritor, on the other hand, would have generated nearly $9 million in farm income for an average of nearly $300,000 per year.

Intergenerational Implications

In the current tax environment, neither of our landowners would be in a position where their assets were subject to estate taxes when they die. In most jurisdictions, their heirs would not be subject to inheritance taxes. This has tremendous intergenerational implications.

Suppose our original purchaser and inheritor both die in 2022. Sufficient land is sold to cover their remaining mortgage debts and rental income (savings) shortfalls, and their land is bequeathed to heirs prior to the end of 2022.

We assume that property sold to cover existing debts is subject to capital gains taxes totaling 23.98% at the national and state level. We assume that any remaining property passes to the next beneficiary tax free. We also assume that the basis of any inherited land is stepped-up upon inheritance, freeing the beneficiary from any capital gains that had accrued to the deceased owner.

In order to clear $5.4 million in outstanding debts, our inheritor’s estate liquidates a total of 515 acres of land. Disposing of the highest-basis land acquisitions to minimize capital gains taxes covered both the outstanding debts and a $273,863 capital gains tax obligation (an average of $530 per acre sold).

At the conclusion of these transactions, our inheritor’s beneficiary is bequeathed 1617 acres of land valued at nearly $17.9 million. Of this, $12.9 million was acquired as capital gains by the previous owner. Stepping up the beneficiary’s basis is equivalent to a gift of $3.1 million in foregone capital gains taxes (over $1,900 per bequeathed acre).

It should be noted that, even had the estate or beneficiary paid or retained liability for these taxes, the beneficiary would still have received land of sufficient value to remain among the top “1%.” All of this results from the simple appreciation of the inheritance of an average Iowa farm over 30 years. Within this land appreciation model it has not even been necessary for the original inheritor to farm the land. Rental values and appreciation were all that were required to generate this result.

Alternatively, consider our other example, the individual who bought 325 acres in 1992. At the point of death in 2022, the value of land owned is nearly $3.9 million. Debts are $779,863. In order to clear debt, this estate liquidates 81 acres of land. This includes the 27 acres purchased in 2013 and 54 of the original 325 acres purchased in 1992.

The sales result in a capital gains tax obligation of $112,180 or $1,385 per acre sold. Note that this is over 250% of the per-acre capital gains tax obligations for our original inheritor. This is because our inheritor was able to continue acquiring land as land appreciated. This increased his basis on land sold, which reduced his capital gains on transactions. Our original buyer was able to acquire only 27 additional acres over the model period. The majority of his sales came from land with 30 years of capital gains.

After the land sales, our original owner’s beneficiary is bequeathed 271 acres valued at nearly $3 million. Of this, $2.3 million accrued as capital gains to our original purchaser. Stepping up the basis of this farmland at inheritance is effectively a gift of a little over $551,000 to our original purchaser’s beneficiary ($2,034 per acre bequeathed).

Questions of Equity

If we were able to continue the model, we would start with two beneficiaries:

• Heir A: our original inheritor’s heir bequeathed 1617 acres
• Heir B: our original purchaser’s heir bequeathed 271 acres

In 2023, our two heirs would be able to leverage their unencumbered inheritances. Heir A could purchase 2,425 acres for a total of 4,048 acres with 40% equity. Heir B could purchase 406 acres for a total of 677 acres with 40% equity. This is where cycle number two begins. 

There are clearly issues of equity revealing themselves. Recall that we did not expect any of the owners to farm their land. They did nothing other than fully exploit their passive income from rents and their passive appreciation in land values. There is no difference in behavior or apparent merit between our participants, yet their opportunities at the outset of any cycle are vastly different and are diverging.

In addition to the disparity noted above, there are serious concentration problems. To begin the first cycle, our two participants each acquired one average sized farm (325 acres of land). At the end of the cycle, they bequeathed 1,888 acres. In effect, they concentrated nearly 4 additional average sized farms into their two operations. To start the second cycle, our two heirs immediately purchased an additional 2,831 acres of land. Even given an increased average farm size of 345 acres, this transaction concentrated another 8.2 average-sized farms into their two operations. The relative ease with which inheritors can multiply their holdings stands in stark contrast to the opportunities available to new purchasing entrants (recall our first generation, above).

Assuming that this cycle of land value increases over 30 years is consistent, in less than 6 generations (30-year cycles) our two current heirs will have accumulated land in excess of the current farmland total in Iowa. This is unstable just between the two of them. Assuming they are not alone, the individual advantages proffered by inheritance will almost certainly lead to an unstable and unsupportable farmland market in a couple of cycles.

The situation our model illustrates is a market failure. We have two individuals who cannot be distinguished with respect to market performance yet see inevitably diverging economic outcomes. In addition to that, we have a rapidly concentrating land market that inhibits market competition and competitor entrance. Furthermore, we have inheritance and capital gains tax environments that exacerbate the problems illustrated.

Conclusion

At the outset, we noted that the majority of the top “1%” is not otherworldly. Our model demonstrates that a relatively common inheritance and equity appreciation can move an individual into the “1%” in the course of a single generational cycle if that individual diligently exploits and capitalizes unearned incomes and equity appreciation. Our model also shows that individuals starting from scratch with similar assets cannot match the results of inheritors, even if no distinction can be made between them in terms of economic merit.

This points to economic failures that could and should be addressed by the estate, inheritance, and capital gains tax environments. If we are going to provide opportunity to every individual, we need to assure that the accumulations of previous generations do not override the potential of current participants.