IRS proposes rules to let farmland sellers pay the tax in four annual installments, if the land stays a farm for 10 years

The Treasury Department and the IRS on Monday proposed rules for a new election that lets people who sell farmland to an active farmer pay the federal tax on their gain in four equal annual installments instead of all at once. The election, created by Section 1062 of the tax code in last year's tax law, applies to sales in taxable years beginning after July 4, 2025, according to the IRS announcement.

Who qualifies

• The land: U.S. real property that the seller used for farming, or leased to a qualified farmer for farming, during substantially all of the 10 years before the sale.
• The buyer: an individual who is actively engaged in farming. A sale to a developer, a fund or a corporation does not qualify.
• The restriction: the land must carry a legally enforceable restriction that generally keeps it in farming use for 10 years after the sale.

Landlords who lease ground to working farmers can qualify through the lease route. The proposed rules also cover partnerships, S corporations, trusts and estates. For a partnership or S corporation, each partner or shareholder generally makes their own election on their share of the gain. The rules also explain how land can still meet the 10-year test if it was temporarily out of production under a government program, as part of normal farming practice, or because of events outside the owner's control.

What the payments look like

Each installment is 25% of the tax attributable to the gain. The first is due on the regular due date of the return for the year of the sale, without extensions, and each of the others is due on the following year's regular return due date.

A worked example: an individual sells qualifying farmland in 2026, and the federal tax attributable to the gain comes to $240,000. Without the election, all $240,000 is due with the 2026 return in 2027. With it, $60,000 is due with the 2026 return, then $60,000 with each of the 2027, 2028 and 2029 returns. The seller keeps $180,000 in hand for the first year, and less each year after that.

What most summaries will miss

The full proposed regulation contains three details the press release does not:

• One missed payment ends the deal. If the IRS adds a penalty for failing to pay an installment on time, all remaining installments become due on the date of that failure. For an individual, death is also an acceleration event, and for a C corporation, trust or estate, a liquidation, sale of substantially all assets or bankruptcy can be.
• Seller financing does not stack. Many farmland sales are already done with the seller carrying a note and reporting the gain as payments arrive. The regulation's own example shows that when a seller uses that installment method, the four-year election applies only to the gain recognized in the year of sale, not to gain recognized in later years.
• It takes paperwork. Electing requires Form 1062 and a Schedule A (Form 1062) filed with the return, and a pass-through entity must give its owners a copy of the schedule and the farming restriction. Treasury estimates the cost for a small business at $237.40, or 8.45 hours, per election.

Treasury estimates, from 2023 filing data, that about 1.9 million small entities may be eligible, but says far fewer will use it in any year because it only applies when qualifying land is actually sold to an individual farmer.

Who this is for, and the trade-off

The clearest users are a retiring farmer selling to a neighbour or a younger operator, and a family partnership or landlord selling leased ground to the tenant who farms it. The trade-off is the 10-year restriction: the seller gets time to pay the tax, but the land comes off the table for anyone who wants to build on it. Where a development buyer is bidding far above farm value, spreading the tax over four years will not close that gap. Where the likely buyer is a farmer anyway, the election is mostly upside.

Nothing is final yet. Treasury and the IRS are taking comments until November 30, 2026, and requests for a public hearing are due by the same date. Sellers planning a closing this year should take the proposed text to their tax preparer now rather than wait for the final rule. Farms are also carrying record fuel costs this harvest, which we covered in what record diesel means for farms.

Sources: IRS news release IR-2026-115; Treasury and IRS proposed regulations, Federal Register public inspection 2026-19888. This is general information, not tax advice.