Rising land values continue to pressure family farmers across Kentucky and the broader region. For many retiring landowners, the difficult reality is that the highest bidders for farmland are often developers or investors—buyers who may convert agricultural land to non-farm use. To help preserve working farmland and ease tax burdens for farm families, Congress introduced a new provision as part of the One Big Beautiful Bill Act of 2025.
This provision—new IRC Sec. 1062—allows eligible taxpayers who sell qualified farmland property to a qualified farmer to pay the resulting tax on the gain in four equal annual installments. The rule applies to sales occurring on or after July 4, 2025.
Supporters, including the Farm Bureau, championed the measure as a way to encourage retiring landowners to keep farmland in agricultural production and support rural economies.
Why Congress Created IRC Sec. 1062
The 2025 Act included several agriculture-focused reforms aimed at strengthening rural communities and ensuring farmland stays in the hands of working farmers. A key concern driving these changes:
- Escalating farmland values have made it difficult for younger or smaller-scale producers to compete with non-farm buyers.
- Sellers face a tax disincentive when choosing a farmer over a developer offering a higher price.
New IRC Sec. 1062 helps bridge this gap. By allowing sellers to spread the tax on their gain over four years, the rule lowers the seller’s upfront tax burden, making it more feasible to sell to an active farmer at a competitive price.
Importantly, this provision does not eliminate tax on the gain—it simply adjusts the timing of when tax is paid. Still, for many farm families, smoothing out payments over four years can significantly improve cash flow during a transition.
How the Four-Year Installment Election Works
Under IRC Sec. 1062(a), a taxpayer may elect to pay the “applicable net tax liability” from the sale in four equal installments if:
- The property sold is qualified farmland property; and
- The buyer is a qualified farmer.
The installment schedule is strict:
- 1st installment: due on the regular due date of the federal income tax return for the year of the sale (no extensions allowed).
- Next 3 installments: due on the return due dates for the subsequent three tax years.
This election applies separately from a traditional installment sale under IRC Sec. 453. Even if the seller receives all cash at closing, the tax payment itself may still be spread over four years.
What Counts as Qualified Farmland Property?
To qualify under IRC Sec. 1062(d)(2), the property must meet both of the following tests:
- 10-Year Use Requirement
The land must have been:
- Used by the taxpayer as a farm for farming purposes, or
- Leased by the taxpayer to a qualified farmer for farming purposes,
during substantially all of the 10-year period ending on the date of the sale.
- Recorded 10-Year Covenant Requirement
At the time of sale, the property must be subject to a legally enforceable covenant restricting it to farm use for at least 10 years after the sale.
This covenant must be recorded and attached to the taxpayer’s return when making the election.
Understanding the ‘Applicable Net Tax Liability’
IRC Sec. 1062(d)(1) defines the applicable net tax liability as the difference between:
- The taxpayer’s net income tax with the gain recognized, and
- The taxpayer’s net income tax without that gain.
Net income tax reflects the regular tax liability minus certain nonrefundable credits and other business-related credits. Notably, it is not reduced by the minimum tax credit.
This calculation is important because it determines the amount split into four annual payments.
Making the Election
Taxpayers must make the election no later than the regular due date of the return for the year of the sale.
- For partnerships and S corporations, the election is made at the partner or shareholder level, not by the entity itself.
- A copy of the recorded farmland-use covenant must be attached to the return.
If the IRS later determines a deficiency in the applicable net tax liability, that deficiency is prorated across remaining installments (unless the deficiency arises from negligence, intentional disregard of rules, or fraud).
When Installments Accelerate
Certain events immediately trigger the remaining installments to become due:
- Late payment of any required installment.
- Death of an individual taxpayer (installments due on the return due date for the year of death).
- For C corporations, trusts, and estates:
- liquidation or sale of substantially all assets,
- cessation of business (C corporations), or
- similar events.
There is an exception if substantially all assets are sold and the buyer agrees to assume the installment obligations.
Conclusion
IRC Sec. 1062 offers farm sellers a valuable new tool to manage cash flow when transferring farmland to the next generation of producers. Although this is not a deferral of gain, spreading the associated tax over four years can significantly ease liquidity pressures at the time of sale.
For sellers and buyers committed to keeping land in agriculture, this new election supports long-term stewardship and strengthens rural economies.
If you have questions about how the new rules apply to your farm or land sale plans, our team is here to help.
