Selling Farmland? How Section 1062 Can Spread Federal Tax Over Four Years
A new federal tax election can materially change the cash flow consequences of selling qualifying farmland. Internal Revenue Code Section 1062 allows an eligible seller to pay the federal income tax attributable to gain from certain farmland sales or exchanges in four equal annual installments when the property is transferred to a qualified farmer.
The provision can be valuable when a landowner wants to sell farmland without immediately reinvesting the proceeds through a Section 1031 exchange and without necessarily relying on a buyer financed installment sale. It also adds several requirements that should be addressed before the transaction closes, particularly the required farm use covenant.
For landowners evaluating a sale, Section 1062 should be considered as part of the broader real estate tax planning analysis rather than after the transaction has already been completed.
Section 1062 Allows Four Annual Federal Tax Payments
Section 1062 was enacted by Section 70437 of Public Law 119-21. It applies to qualifying sales or exchanges in taxable years beginning after July 4, 2025.
For a calendar year taxpayer, that generally means the first eligible taxable year is 2026.
If the requirements are satisfied and the taxpayer makes the election, the applicable net tax liability attributable to the qualifying sale or exchange is paid in four equal annual installments. Each installment equals 25% of the applicable net tax liability.
The applicable net tax liability is not simply 25% of the gain. Under Section 1062(d)(1), it is generally the excess of the taxpayer's net income tax for the year over the net income tax that would have applied if the gain from the qualifying sale or exchange were excluded from the calculation.
The actual computation can be more complex when the transaction involves other gains, losses, credits, Section 1231 items, depreciation recapture, or other tax attributes. Section 1062 changes the payment timing of the qualifying tax liability. It does not replace the underlying rules that determine the amount and character of the gain.
The Property Must Meet the Qualified Farmland Requirements
Section 1062 does not apply to every sale of rural land.
Qualified farmland property generally must be real property located in the United States that, during substantially all of the 10 year period ending on the sale or exchange date, was either:
- Used by the taxpayer as a farm for farming purposes, or
- Leased by the taxpayer to a qualified farmer for farming purposes.
The terms farm and farming purposes generally use the definitions in Section 2032A(e).
The proposed regulations also provide rules addressing certain periods when the property was temporarily not producing agricultural output, certain property acquired during the 10 year period, inherited property, and property acquired in transactions involving transferred basis. These rules can matter when the taxpayer has not personally owned the same parcel in exactly the same form for the entire 10 year period.
If only part of a larger property qualifies, the proposed regulations generally require an equitable allocation of basis and amount realized between the qualifying and nonqualifying portions. Documentation supporting that allocation should be retained.
The Buyer Must Be a Qualified Farmer
The buyer also matters.
Section 1062(d)(3) defines a qualified farmer as an individual who is actively engaged in farming within the meaning of 7 U.S.C. Section 1308-1(b) and (c).
The proposed regulations provide additional rules for ownership through disregarded entities and for certain planned transfers after the acquisition. The structure of the buyer should therefore be reviewed before assuming that the seller qualifies for the election.
This requirement distinguishes Section 1062 from tax provisions that focus primarily on the seller or the property. A qualifying property sold to a buyer who does not satisfy the qualified farmer requirements can prevent the election from being available.
The 10 Year Farm Use Covenant Must Be Addressed Before Closing
The covenant requirement is one of the most important transactional requirements under Section 1062.
Qualified farmland must be subject to a covenant or other legally enforceable restriction preventing the property from being used for purposes other than farming during the 10 year period following the sale or exchange.
The September 2026 proposed regulations provide substantially more detail. Under proposed Treasury Regulation Section 1.1062-1(t), the covenant generally must:
- Restrict the property to farm use for at least 10 years following the transaction.
- Be executed before or contemporaneously with the closing.
- Be recorded in the applicable land records before or contemporaneously with the deed.
- Be enforceable against the buyer and future owners.
- Run with the land for the required period.
An easement or similar property interest can potentially satisfy the requirement when it has the necessary attributes under applicable law.
This is not merely a tax return attachment prepared months after closing. The restriction itself is part of the qualification requirements. The proposed regulations also require the taxpayer to attach a copy of the Section 1062 covenant to the return for the year of the transaction.
Accordingly, a taxpayer considering the election should coordinate the tax analysis and the real estate documentation before the sale closes.
The Election Deadline and Payment Deadline Are Different
The proposed regulations contain an important timing distinction.
The Section 1062 election generally may be made by the due date of the taxpayer's return, including an extension. The taxpayer makes the election using Form 1062 and Schedule A (Form 1062), together with the required information and covenant.
However, the first 25% installment is generally due on the regular return due date without regard to an extension.
For example, a calendar year individual making a Section 1062 election for a qualifying 2026 sale would generally have the first installment due April 15, 2027, even if the individual extends the 2026 Form 1040 filing deadline until October 15, 2027.
This creates an unusual situation in which the first payment can be due before the taxpayer files the return containing the election.
Taxpayers planning to use Section 1062 should therefore calculate the expected applicable net tax liability before the regular return payment deadline rather than waiting until the extended filing deadline.
Partnership and S Corporation Sales Require Owner Level Planning
Section 1062 contains special rules when qualifying farmland is sold by a partnership or S corporation.
In the common situation where the entity itself does not owe federal income tax on the gain, the Section 1062 election is generally made by the partners or shareholders rather than by the entity.
The proposed regulations require the pass through entity to provide the information necessary for its owners to make their individual elections. A partnership or S corporation generally files Schedule A (Form 1062), reports the owner's allocable share of the qualifying gain on the applicable K-1, and provides the required supporting information and covenant.
Each eligible owner then determines whether to make a Section 1062 election for the tax attributable to that owner's share of the gain.
This can produce different decisions among owners because each owner's applicable net tax liability depends on that owner's own federal tax situation.
Section 1062 and Section 453 Do Not Provide the Same Deferral
A Section 453 installment sale and a Section 1062 election address different aspects of the tax calculation.
Under Section 453 installment sale rules, qualifying gain is generally recognized as payments are received. Section 453 therefore changes the timing of gain recognition.
Section 1062 generally leaves the qualifying gain recognized under the otherwise applicable tax rules but permits the associated applicable net tax liability to be paid over four annual installments.
The proposed regulations specifically address transactions in which Section 453 also applies. Proposed Treasury Regulation Section 1.1062-2(g)(5) provides that only the gain actually recognized and included in gross income in the relevant taxable year is used to determine the Section 1062 applicable net tax liability. The proposed example states that no Section 1062 election is available for the tax liability attributable to the portion of the gain deferred to a later taxable year under Section 453.
This means the payment terms in the purchase agreement can materially affect the interaction between the two provisions.
Section 1031 Remains a Different Planning Alternative
A qualifying Section 1031 exchange can defer recognized gain when business or investment real estate is exchanged under the requirements of Section 1031.
Section 1062 does not require the seller to acquire replacement real estate. Instead, it focuses on the nature and historical use of the farmland, the status of the buyer, the required covenant, and the timing of the federal tax payments.
A landowner who intends to remain invested in real estate may have a different planning objective from a landowner who wants to sell farmland, retain the proceeds, and transition out of the property.
The appropriate analysis should therefore compare the transaction structure rather than treating Section 1062, Section 453, and Section 1031 as interchangeable elections.
Section 1231 and Other Gain Character Rules Still Matter
Section 1062 does not replace the rules used to determine the character of the gain.
Farmland and related business real estate can implicate Section 1231, depreciation recapture provisions, prior losses, and other rules. For example, a taxpayer with prior Section 1231 losses may need to consider the Section 1231 five year lookback rule when determining the character of current gain.
The Section 1062 calculation is performed after determining the amount of gain recognized under the otherwise applicable provisions. A taxpayer should therefore calculate the underlying transaction correctly before determining the amount of tax eligible for installment payment.
California Does Not Conform to Section 1062
California taxpayers need a separate state analysis.
The California Franchise Tax Board's current Summary of Federal Income Tax Changes specifically identifies Section 70437 of Public Law 119-21, which enacted IRC Section 1062, and states that California does not conform.
As a result, a federal Section 1062 election does not create a corresponding California election to spread the California income tax attributable to the sale over the same four annual payment schedule.
A California taxpayer may therefore receive a meaningful federal cash flow benefit while still needing to pay California tax under the normal California rules applicable to the transaction.
This difference should be modeled before closing because the federal election alone does not determine the amount of cash that should be reserved for state taxes.
Estimated Tax Planning Also Requires Attention
The timing of estimated tax payments created a separate issue when Section 1062 was enacted.
IRS Notice 2026-3 provides estimated tax penalty relief and computational guidance for taxpayers properly making a Section 1062 election. Current IRS guidance generally allows the estimated tax calculation to reflect the 75% portion of the applicable net tax liability that is deferred beyond the first installment.
This treatment is important because a taxpayer should not automatically calculate federal estimated tax as though the entire Section 1062 liability were currently payable.
The estimated tax calculation should still be coordinated with the actual election, the amount of qualifying gain, other income for the year, withholding, prior payments, and the taxpayer's applicable estimated tax safe harbor.
Late Installments Can Eliminate the Expected Deferral
The installment schedule should be treated as a firm payment obligation.
Current IRS administrative guidance states that the scheduled Section 1062 installments may be paid without interest or penalties when the statutory requirements are satisfied and the payments are timely. However, a late or insufficient installment can result in penalties and interest and can cause the remaining deferred installments to become due.
Section 1062 also contains acceleration rules for other events. For an individual, death generally accelerates the remaining unpaid installments. Additional acceleration rules can apply to C corporations, trusts, and estates in circumstances such as liquidation, disposition of substantially all assets, or similar events.
The election therefore provides a payment deferral, but the remaining liability should continue to be monitored until all four installments have been paid.
The Proposed Regulations Are Not Yet Final
The September 2026 regulations are proposed regulations, not final regulations.
Treasury and the IRS state that taxpayers may rely on the proposed regulations for qualifying sales or exchanges occurring in a taxable year beginning after July 4, 2025, and ending on or before final regulations are published, provided the taxpayer complies with the proposed regulations in their entirety and consistently.
That reliance rule is important for 2026 transactions because calendar year taxpayers can already have sales that fall within Section 1062 even though the regulations remain proposed.
Comments on the proposed regulations are due November 30, 2026. The rules should therefore be monitored for changes before future transactions and filings.
Section 1062 Planning Should Begin Before the Farmland Is Sold
Section 1062 is most useful when it is considered during transaction planning rather than during tax return preparation.
Before closing, the seller should generally evaluate:
- Whether the property satisfies the prior 10 year farm use requirement.
- Whether the purchaser qualifies as a qualified farmer.
- Whether the required Section 1062 covenant can be properly executed and recorded as part of the transaction.
- The expected federal applicable net tax liability and four annual payment amounts.
- Whether Section 453, Section 1031, or another transaction structure produces a better tax and cash flow result.
- The effect of Section 1231 and applicable recapture provisions.
- California or other state tax obligations that may not follow the federal payment deferral.
- The estimated tax consequences for the year of sale.
The benefit can be significant when a qualifying seller wants liquidity from the sale while avoiding payment of the entire federal tax attributable to the transaction in the first year. The requirements, however, are transaction specific and several of them must be satisfied at or before closing.
See current federal rates on the Economic Dashboard.
Primary Authority and Current Guidance
The principal authorities for the rules discussed above include IRC Section 1062; Section 70437 of Public Law 119-21; proposed Treasury Regulations Sections 1.1062-1 through 1.1062-3, REG-117095-25, 91 FR 61367; IRS Notice 2026-3; Form 1062 and its instructions; and current IRS administrative guidance under IRM 5.19.28.
See the IRS announcement regarding the proposed Section 1062 regulations, the September 29, 2026 proposed regulations, the Instructions for Form 1062, and the California FTB Summary of Federal Income Tax Changes.
