Farmers Can Now Defer Payment of Tax on Sale of Farmland

The One Big Beautiful Bill creates a new statute (26 U.S. Code § 1062) through which those selling farmland property to a qualified farmer can choose to pay their taxes on the gain in four equal installments instead of all in the year of sale. Unlike a 1031 exchange, there is no requirement to reinvest the sale proceeds in replacement real property.

The IRS has not yet published proposed regulations for the new Section 1062 so there are unanswered questions that will hopefully receive clarification soon.

What is Section 1062?

As of July 4, 2025, Congress enacted a new provision in the Internal Revenue Code, Section 1062, to address taxation when farmland is sold or exchanged.

Under Section 1062, a taxpayer who sells or exchanges “qualified farmland property” to a “qualified farmer” may elect to pay the income tax on the gain in four equal annual installments, rather than all in the year of sale. There is no interest charged on the delayed payments.

Who and What Qualifies?

For the law to apply, both the property and the buyer must meet specific criteria:

Qualified Farmland Property. The real property must be located in the U.S. and must have been used by the seller as a farm (or leased to a farmer) for “substantially all” of the 10-year period immediately prior to sale.
Restrictive Covenant. There must be a legally enforceable covenant or restriction recorded that prohibits non-farm use of the property for at least 10 years after the sale. A copy of this restriction must be filed with the seller’s income tax return.
Qualified Farmer (buyer). The buyer must be an individual who is “actively engaged in farming,” as defined under federal law.

What the Installment Election Does, and How It Works

When a farmer make the election under Section 1062, the portion of their net income tax attributable to the gain becomes payable in four equal installments.

The first installment is due on the regular due date (without extensions) for the return for the year of sale.
The remaining three installments are due each subsequent year on that year’s regular return-due date.
However, if any installment is not paid on time, the remaining balance becomes immediately due.
If the seller is a pass-through entity (like a partnership or an S-corporation), the election is made at the partner or shareholder level rather than at the entity level.
Seller must include a copy of the enforceable covenant restricting future non-farm use along with your tax return.

What to Watch Out For — Practical Considerations & Limitations

Although Section 1062 offers a valuable tax-deferral mechanism, it comes with significant strings:

The 10-year pre-sale history and 10-year post-sale use restriction requirement can limit eligibility.
You need to properly execute and record a covenant restricting non-farm uses, and include it with your tax return.
The installments become due immediately if you miss a payment or, in the case of non-individual sellers, if there is a liquidation or major asset sale.
Because the election must be made by the due date of the original return, timing and documentation matter.
For farms held by partnerships or S-corporations, each partner or shareholder must individually make the election, adding paperwork complexity.

Bottom Line: A Potential Win if You Plan Carefully

Section 1062 adds a powerful tool for farmland sellers who want to sell their land without incurring a crippling tax burden in a single year. For those selling to genuine farmers committed to keeping the land in agriculture, the four-year installment can smooth cash flow and help preserve farmland use for future generations.

Any farmer, landowner, or advisor considering using Section 1062 should involve a CPA or tax attorney before completing a sale of farmland to make sure the formalities are followed correctly.

Beau A. Cross

November 2025