Farmland Tax Installment Payment Rules

Treasury and the IRS have issued proposed regulations under Section 1062 to implement an election available for tax years beginning after July 4, 2025, that allows taxpayers to pay tax on the gain from the sale of qualified farmland property in equal annual installments over four tax years. The proposed regulations define eligible property and buyers, provide filing and payment mechanics, and specify when deferred amounts accelerate.

Background

Section 1062 was enacted by the OBBBA in 2025. It allows a taxpayer that has gain from a qualified sale or exchange of qualified farmland property to a qualified farmer to pay the tax attributable to that gain in four equal annual installments, rather than in full, with the return for the year of sale. No interest is charged on deferral of the tax payments.

The statute limits the election to the taxpayer’s applicable net tax liability, which is the excess of net income tax for the year over the tax computed without the gain from the qualified sale or exchange of farmland property. The statute also provides rules regarding installment payments, requires that the election be made by the return due date, and accelerates the unpaid balance in several situations, including missed installment payments and certain termination-type events. Generally, qualified farmland property is real property located in the United States that, for substantially all of the prior 10-year period, was either used by the seller as a farm for farming purposes or leased by the seller to a qualified farmer for farming purposes. The property also must be subject to a legally enforceable covenant that restricts the use of the land to farming for 10 years after the sale. A seller making the election must attach the covenant to the return.

Key provisions of the proposed regulations

Qualified farmland property

The proposed regulations provide various rules for determining if the farmland property meets the prior 10-year farming requirements and requires that a covenant enforceable against a buyer and future owners restricting the use of the property is executed and recorded in local land records before or contemporaneously with any sale of the property.

Crowe observation

The required covenant severely restricts the availability of the election and could add significant costs to the transaction.

If only part of the property sold is farm-use land or only part is covered by the covenant, only that portion qualifies for the election, and taxpayers must maintain records to support basis and amount-realized allocations.

Procedural rules

To make the election, taxpayers generally must file Form 1062, “Deferral of Tax on Gain From the Sale or Exchange of Qualified Farmland Property to Qualified Farmers,” and attach the related Schedule A (Form 1062) with the return for the year of the sale. The first installment of the tax is due on the unextended due date of the taxpayer’s return for the year of the sale. The remaining installment payments are required to be made by the unextended due date of the taxpayer’s return in equal amounts for the next three years.

For partnerships and S corporations, and in some cases trusts and estates, the election is made at the owner or beneficiary level for the tax related to the allocable portion of that person’s gain from the qualified farmland sale. A pass-through entity with its own entity-level liability can make a separate election for its portion of the liability. Owners and beneficiaries are eligible to make an election to pay the tax related to their allocable portion of the of the gain in installments only if the entity files Schedule A (Form 1062), furnishes the Section 1062 covenant and information about the sale (including the amount of allocable gain on the sale) to its owners or beneficiaries, and reports each owner’s or beneficiary’s allocable share of qualifying gain on a Schedule K-1.

Crowe observation

The new reporting obligations can increase burden and complexity, potentially creating an opportunity for missteps which could cause an inadvertent failure to make a valid election.

Unpaid installments accelerate if the taxpayer fails to timely pay an installment, if an individual taxpayer dies, or if a C corporation, trust, or estate liquidates, sells substantially all of its assets, ceases business, or encounters certain consolidated return changes. C corporations, trusts, and estates can avoid acceleration on the sale of substantially all of its assets if the sale is to a single eligible U.S. transferee that assumes the remaining Section 1062 liability under a timely filed, properly completed transfer agreement on Form 1062-T. An eligible U.S. transferee cannot be a partnership, S corporation, insolvent person, or bankruptcy debtor.

Any increase in tax due to an audit deficiency related to the sale of qualified farmland property for which the Section 1062 election has been made is prorated across remaining installments, except in the case of negligence, intentional disregard, or fraud, in which case the full amount of the remaining tax is due on notice and demand.

The regulations are proposed to apply to qualified sales and exchanges in taxable years ending after the date final regulations are published, but taxpayers can rely on the proposed regulations for earlier qualifying years if they follow them fully and consistently.

Looking ahead

Taxpayers that sold or are considering selling farmland should consult their tax advisers to evaluate whether the transaction is eligible for the tax payment installment election and, if the election will be made, advise on compliance with the covenant, documentation, and recordkeeping requirements. While making the election can provide a cash flow benefit, taxpayers will need to plan for making installment payments on time to avoid triggering acceleration of the full amount due.