The One Big Beautiful Bill Act (OBBBA), Public Law 119-21, 139 Stat. 72 (July 4, 2025), created a new election through which qualifying sellers of farmland can choose to pay their taxes on the gain in four equal installments, instead of all in the year after the sale. I.R.C. § 1062. The first installment is paid by the due date of the return for the tax year of the sale or exchange. The additional installments are paid with the next three returns.
The section 1062 election allows sellers to hold onto their money longer and profit from it. It does not change the calculation of the tax, allow sellers to lower their tax rates, or provide a mechanism to avoid the net investment income tax. The election is available to individuals, trusts, and entities such as corporations and partnerships. The provision is effective for sales or exchanges occurring in tax years beginning after July 4, 2025. For calendar year taxpayers, 2026 is the first year for which they can make this election.
Mechanics
Specifically, section 1062(a) allows a taxpayer who has gain from the sale or exchange of “qualified farmland property” to a “qualified farmer” to elect to pay the net tax liability in four equal installments.
“Qualified Farmland Property”
“Qualified farmland property” is real property located in the United States that during substantially all of the 10-year period ending on the date of the qualified sale or exchange:
- has been used by the taxpayer either as a farm for farming purposes or leased by the taxpayer to a qualified farmer for farming purposes, and
- is subject to a covenant or other legally enforceable restriction which prohibits the use of such property other than as a farm for farming purposes for 10 years after the date of the qualified sale or exchange.
Property that is used or leased by a partnership or S corporation is treated as used or leased by each person who holds a direct or indirect interest in such entity.
The terms “farm” and “farming purposes” have the same meanings used for special use valuation.
The term “farm” includes stock, dairy, poultry, fruit, furbearing animal, and truck farms, plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards and woodlands. I.R.C § 2032A(e)(4).
The term “farming purposes” means
- cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for, training, and management of animals) on a farm;
- handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity so treated; and
- the planting, cultivating, caring for, or cutting of trees, or the preparation (other than milling) of trees for market. I.R.C § 2032A(e)(5).
“Qualified Farmer”
A “qualified farmer” is an individual who is actively engaged in farming within the meaning of 7 U.S.C. §§ 1308-1(b) and (c)). These are the same rules used to determine farm program payment eligibility.
Covenant or Use Restriction Required
The seller can only make the election if the land is subject to a covenant or other legally enforceable restriction which prohibits the use of the property other than as a farm for farming purposes for 10 years after the date of the sale or exchange. A copy of the covenant must be filed with the first tax return following the sale or exchange.
Acceleration of Payments
The statute includes several acceleration provisions. If the seller fails to make timely payments of the installments when due, they will be subject to a penalty, and the unpaid portion of all remaining installments will be due on the date of the failure.
In an individual seller dies, the unpaid portion of all remaining installment shall be paid on the due date for the return for the taxable year in which the taxpayer dies.
If the seller is a C corporation or a trust or estate and there is a liquidation or sale of substantially all the assets of the taxpayer (including bankruptcy), a cessation of business by the taxpayer (in the case of a C corporation), or any similar circumstance, then the unpaid portion of all remaining installments will be due on the date of the event.
Note: If a deficiency in tax is assessed against the seller and it is not due to negligence, intentional disregard, or fraud, the deficiency will be prorated across the required payments.
Making the Election
To defer the payment of income tax liability, the qualifying taxpayer must make a section 1062 election on a timely filed return for the tax year of the sale or exchange. For partnerships and S corporations the election is made at the partner or shareholder level.
IRS has created Form 1062 and Form 1062 (Schedule A) to allow taxpayers to make the section 1062 election. The forms are still in draft for the 2025 tax year. Form 1062 allows the taxpayer to calculate the net tax due, and Schedule A asks questions to ensure the taxpayer is qualified to make the election.
Partnerships and S corporations must provide partners and shareholders with the information they need to make an election under section 1062.
An S corporation must complete a separate Schedule A (Form 1062) for each sale or exchange of qualified farmland property to qualified farmers as defined under section 1062 and attach the form(s) to the Form 1120-S. They must also provide partners and shareholders with a copy of the covenant and information regarding the gain on the sale or exchange of qualified property.This information is provided on an attached statement that must be titled, “Section 1062 Information Schedule K-1”. They must use box 17, code ZZ to provide shareholders information from Schedule A (Form 1062), Part I and their distributable share of Part II.
It appears that the partnership must also complete a Schedule A (Form 1062) and provide a copy to the partners. Additionally, the partnership is to provide to the partners an attachment titled “Section 1062 Information Schedule K-1, box 20, code ZZ” and include a copy of the covenant. The amount in the box is to correspond to the partner's distributable share.
Interaction with Estimated Tax Requirements
Generally, taxpayers must pay Federal income taxes as they earn their income. If taxes are not withheld from wages or other income, the taxpayer normally must pay quarterly estimated income tax. Taxpayers not paying sufficient estimated tax are subject to penalty under I.R.C. §§ 6654 or 6655. Qualified farmers are exempt from the estimated tax penalty if they file their return and pay their tax due by March 1 following the tax year or make a payment covering 2/3 of their tax liability by January 15 following the tax year.
IRS has issued Notice 2026-3 to provide relief from an underpayment penalty to a taxpayer making a valid section 1062 election. If the required tax isn’t paid because of the election, the Notice waives penalty that would otherwise apply.
Specifically, the Notice states that the IRS will waive the portion of the addition to tax under sections 6654 and 6655 attributable to a proper section 1062 election. The limited waiver applies to the net tax liability deferred by the election. In other words, a taxpayer may exclude 75 percent of the applicable net tax liability (with respect to the qualified sale or exchange) from the calculation of the required annual payment for purposes of determining estimated income tax installment amounts for the taxable year of the qualified sale or exchange for which the section 1062 election is made.
A proper section 1062 election is a prerequisite to receiving the estimated tax relief, but an acceleration of installment due dates under section 1062(b)(2) will not affect this waiver. The waiver will apply automatically to any taxpayer who qualifies for the waiver. If the taxpayer eligible for a waiver receives a penalty notice, they should request an abatement by filing Form 843 and noting “Abatement requested pursuant to Notice 2026-3” at the top of the Form.
Example
Jerry sells 450 acres of farmland with a basis of $3,000,000 to a qualified farmer for $5,000,000 in July of 2026. He has rented the farmland to this farmer for the past 12 years. Jerry recognizes $2 million in capital gain from this sale.
Assuming a 20 percent tax rate, total tax liability is $476,000 (including net investment income tax).
If Jerry makes a proper section 1062 election on his 2026 return, he can pay approximately $119,000 of tax each year. The first installment is due in 2027 with the filing of his 2026 return, and additional installments are due with his 2028-2030 returns. Jerry must have an enforceable covenant placed on the land ensuring the land will be used only for farming during the 10 years following the sale.
Assuming a 4.5 percent interest rate, this deferral will save Jerry around $41,000.