New IRS Rules Allow Farmland Sellers to Pay Capital Gains Tax Over Four Years
Washington, Friday, 9 October 2026.
Recent IRS regulations permit qualifying farmland sellers to spread federal capital gains tax liabilities over four annual installments, provided the transaction involves an eligible active farmer and timely filing.
New IRS Rules Allow Farmland Sellers to Pay Capital Gains Tax Over Four Years
Recent Internal Revenue Service regulations permit qualifying farmland sellers to spread federal capital gains tax liabilities over four annual installments, provided the transaction involves an eligible active farmer and timely filing [1][3]. The Treasury and IRS issued proposed regulations under new Code Section 1062 in late September 2026, allowing eligible taxpayers to pay tax on qualified farmland sales in four equal annual installments of 25% per installment [1][5]. This regulatory change aims to optimize capital gains strategies and liquidity management for property owners and agricultural investors who meet specific criteria [1]. The provisions apply to sales or exchanges occurring in taxable years beginning after July 4, 2025, making the 2026 calendar year the first eligible taxable year for most calendar-year taxpayers [5][6].
Regulatory Framework and Eligibility Requirements
To qualify for this installment plan, the seller must have farmed the land for at least 10 years under Farm Service Agency rules, and the buyer must be a qualifying farmer who commits to farming the land for at least 10 years [2][6]. The guidance confirms that farmland featuring normal fallow periods, such as wheat crop rotation, qualifies for the provision, ensuring that standard agricultural practices do not disqualify property owners [2]. Additionally, estates or trusts are eligible as pass-through entities, broadening the scope of potential beneficiaries beyond individual operators [2]. A legally enforceable 10-year farm use covenant must be executed and recorded before or contemporaneously with the closing, and must run with the land [6].
Financial Implications and Calculations
The provision defers tax payment timing but does not defer gain recognition, distinguishing it from Section 453 installment sales or Section 1031 like-kind exchanges [6]. The applicable net tax liability is calculated as the excess of a taxpayer’s net income tax for the year over the net income tax that would have applied if the gain from the qualifying sale were excluded [6]. For example, if total federal net income tax is $240,000 and tax excluding the gain would be $80,000, the applicable net tax liability is 160000, resulting in four annual payments of 40000 each [6]. Farm CPA Paul Neiffer estimates potential tax savings from this provision at approximately 5% to 9%, contingent on investment returns, with a 5% investment return yielding roughly 7.5% in savings [2].
Compliance Timelines and Deadlines
Public comments on the proposed regulations are due by November 30, 2026, marking a critical deadline for stakeholder feedback before finalization [1][5]. For a calendar year individual making a Section 1062 election for a 2026 sale, the first tax installment is generally due April 15, 2027, regardless of whether the individual extends their Form 1040 filing deadline to October 15, 2027 [6]. Tax advisory firm Clear Start Tax highlighted that claiming this election on a timely filed return is crucial, as failure to meet installment deadlines reverts the taxpayer to standard collection processes, including liens and levies [1]. Taxpayers can rely on the proposed regulations for qualifying sales occurring in taxable years beginning after July 4, 2025, provided they comply with the proposed rules in their entirety [6].