Selling the Family Farm to a Farmer: A New Way to Pay the Tax Over Four Years

 

Many of the families we work with have the same quiet question at the kitchen table. Mom and Dad are ready to stop farming. A neighbor or a young farmer wants the ground. But the land has been in the family for decades, and the tax on the gain from a sale looks enormous.

A new federal rule may help. The One Big Beautiful Bill Act created Internal Revenue Code § 1062. It lets a seller who sells qualifying farmland to a working farmer pay the tax on the gain over four years instead of all at once. On September 28, 2026, Treasury and the IRS issued proposed regulations explaining how it will work (IR-2026-115; REG-117095-25).

This post explains what the rule does, what it does not do, and how it fits with aging-in-place and estate planning. It also explains how to capture it if it makes sense for your family.

At a Glance

• What it is: a way to pay the federal income tax on a farmland sale over four years.
• Who can use it: sellers of land farmed for about 10 years, selling to an individual who farms.
• The catch: the gain is still taxed in the year of sale, and the seller's death makes the remaining tax due at once.
• Often the better choice for older owners: holding the land and leasing it, so the heirs receive a stepped-up basis.

What the New Rule Does

Section 1062 lets a seller elect to pay the federal income tax on the gain from a farmland sale in four equal annual installments. The first 25% is due on the original due date of the return for the year of sale, whether or not the return is extended. The other three payments are due on the same date in each of the next three years.

The rule applies to sales in tax years that begin after July 4, 2025. What counts is when the seller's tax year begins, not the date of the sale. For most people, who file on a calendar year, the 2025 tax year began January 1, so even a fall 2025 sale does not qualify; 2026 is the first year the rule applies for calendar year filers. Estates and some trusts with fiscal years should check their own dates.

Here is how the payments look if a sale adds $200,000 to a seller's federal income tax:

Payment	When it is due	Amount
First	Original April due date for the year of sale	$50,000
Second	One year later	$50,000
Third	Two years later	$50,000
Fourth	Three years later	$50,000

Without the election, all $200,000 would be due with the first return.

Three Conditions Must Be Met

The rule looks at three things: the land, the buyer, and a promise about the land's future use. All three must be in place on the day of closing. If any one is missing, the four-year option is lost, and the full tax is due with the return.  They are:

• The land must be qualified farmland. It must be U.S. real property that the seller farmed, or leased to a qualified farmer for farming, for substantially all of the 10 years before the sale. A retired owner who rents the ground to a neighboring farmer can qualify, as long as the tenant is an individual actively engaged in farming;

• The buyer must be a qualified farmer. That means an individual who is actively engaged in farming under federal farm-program rules (7 U.S.C. § 1308-1). A sale to a farming son, daughter, or neighbor who will keep farming fits the rule well; and

• The land must carry a 10-year farming covenant. The deed or a separate recorded instrument must legally prohibit any use other than farming for 10 years after the sale. Under the proposed regulations, the covenant must be recorded at closing, and a copy goes with the seller's return.

The Buyer Side Trap

The proposed regulations add a trap on the buyer's side. If, at the time of the sale, there is a plan or arrangement to pass the land to an unrelated person who is not a farmer, the sale does not qualify. An unplanned later sale does not, by itself, disqualify it, but the 10-year farming covenant still binds any new owner. Specifically, under proposed § 1.1062-1(p)(2), the buyer is not a qualified farmer if:

"pursuant to a plan or an arrangement between the seller, buyer, and a third party existing at the time of a sale or exchange … the qualified farmland property subsequently is transferred to a person who is neither" related to the buyer (under §§ 267(b) or 707(b)(1)) nor a qualified farmer.

The following explains the contours of the trap: 

• It is tested at the time of the sale. A plan or arrangement must exist at closing. A later transfer forced by circumstances nobody planned (financial trouble, foreclosure, divorce, the buyer's death) is not caught by this test.

• The later transfer must also go to the wrong person. A transfer to the buyer's family or related entities is outside the test, even if they don't farm. So is a transfer to another qualified farmer.

• The text arguably requires the seller to be involved. It speaks of an arrangement "between the seller, buyer, and a third party." Read literally, a buyer's private side deal that the seller knew nothing about may fall outside the trap. The IRS, however, may read it more broadly, and this is a good subject for a comment before the November 30 deadline.

• Timing is evidence. A resale to a developer six months after closing invites the argument that a plan existed all along. That's why buyer representations and a documented farming intent matter at closing.

• The regulations are silent on what happens afterward. They don't say whether a later transfer or a covenant breach lets the IRS revoke the seller's election. The acceleration events are all on the seller's side: missed payments, the seller's death, and, for trusts and estates, termination or selling substantially all assets. Nothing makes the buyer's later conduct accelerate the seller's tax. The real exposure is that if a disqualifying plan existed at closing, the election may fail from the start, and the full tax would have been due with the first return.

• The regulations also don't say who enforces the covenant. They require only that it be enforceable against later owners. Under state law, a covenant needs someone entitled to enforce it, such as the seller's retained land, a named holder, or an agricultural easement held by an eligible organization. Drafting that correctly is how the seller protects the covenant's validity.

Practical Protection for the Seller

Put protections in writing, give them teeth, and don't undermine them by engaging in risky or prohibited conduct.  Put the protections in writing: 

• Get the Buyer's promise: The purchase agreement should state plainly that the buyer has no plan or arrangement to pass the land to an unrelated non-farmer.

• Make the Promise Count: If it turns out to be false, the buyer pays the seller's added tax, plus any interest and penalties.

• Stay Out of Side Deals: The seller should never sign onto or help arrange any deal with a later buyer. One side agreement can sink the election.

• Make the Covenant Enforceable: Have it drafted to hold up under your state's law, and record it no later than the deed.

Making the Election

The seller makes the election on Form 1062, filed with the return for the year of sale. If that return is extended, the form can be filed by the extended due date. The first payment is still due in April. Partners and S corporation shareholders elect individually.

IRS Notice 2026-3 also lets sellers leave the deferred tax out of their estimated tax payments. That relief holds only if the election is made properly and every installment is paid on time.

What It Does Not Do

The election spreads out the payment of the tax. It does not spread out the gain. In a cash sale, the entire gain is still reported in the year of sale. For aging clients, that difference matters in four ways:

• Medicare Premiums. Medicare Part B and Part D premiums are based on income from two years earlier. A large gain can raise those premiums for a year, even though the tax is paid over four;

• Medicaid and Other Benefits. Once the sale closes, the proceeds are countable resources. Money set aside to pay later installments is still yours, and a Medicaid caseworker will count it. The election does not shelter anything;

• Lost step-up in basis. Farmland held until death generally receives a new tax basis equal to its value at death. For many families, that erases the gain entirely. A lifetime sale gives up that benefit, and no installment election brings it back;

• State tax and the 3.8% surtax. Only regular federal income tax is spread out. Ohio income tax and the 3.8% net investment income tax on the gain are due for the year of sale.

The election helps with cash flow. It does not reduce the tax.

When Death, Trusts, and Estates Change the Math

For older sellers, the most important rules are the acceleration rules. Under these rules, the remaining installments can become due all at once. That is why the election is often worth more to a healthy 68-year-old landlord than to a frail 93-year-old.

• The Seller's Death: If the seller dies, all remaining installments come due with the seller's final income tax return, on its original due date. The four-year spread ends at death. However, the proposed regulations let a personal representative still make the election for a sale completed before death, so an estate is not shut out entirely.

• Missed Payments. Missing any installment accelerates the full unpaid balance.

• Revocable Living Trusts: A revocable trust is usually a grantor trust. It is disregarded for this purpose, so the grantor makes the election as if the grantor owned the land directly. At the grantor's death, the individual acceleration rule applies.

• Estates and Irrevocable Non-grantor trusts: An estate or non-grantor trust is its own taxpayer. If it terminates, or sells substantially all of its assets, its own remaining installments accelerate. Payments can continue if an eligible transferee agrees to take them over. Beneficiaries who are taxed on part of the gain make their own separate elections.

The practical lesson is liquidity. If a seller in poor health elects the four-year plan, the family should assume the remaining tax may come due within months. Do not spend or give away the money set aside for it. Some families keep a cash reserve or life insurance for this purpose. Make sure the successor trustee and personal representative know the obligation exists.

Weighing It Against the Alternatives

The four-year election is one tool among several. For an older owner, holding the land until death is often the strongest option, because the basis step-up can eliminate the gain. Neither Ohio nor Missouri has an estate tax, and the federal exemption is $15 million per person, so most farm families owe no estate tax at all. The right choice depends on health, cash needs, family plans, and whether a farmer buyer is ready now.

Comparing Your Options for the Family Farm

Option	What it does	Best fit	Watch out for
Section 1062 election	Buyer pays at closing; seller pays the tax over four years	Seller wants a clean cash sale to a working farmer	Gain is still taxed in the year of sale; death accelerates the tax; 10-year farming covenant limits the land
Hold until death; lease in the meantime	Rent provides income; heirs receive a stepped-up basis	Older owner who does not need the sale proceeds	Not an option if the land must be sold to pay for care
Land contract (§ 453 installment sale)	Buyer pays over time; gain is taxed as payments arrive	Buyer needs seller financing	Seller carries the buyer’s credit risk; gain left in the note at death gets no step-up
Like-kind exchange (§ 1031)	Gain is deferred by buying replacement real estate	Owner who wants to stay invested in land	Strict deadlines; the owner still owns and manages real estate
Charitable remainder trust	Trust sells without immediate tax and pays the owner income	Charitably inclined owner	Irrevocable; the remainder goes to charity
Conservation easement	Sells or donates development rights; can bring a deduction	Owner who wants the land kept in farming permanently	Permanent restriction; appraisal and IRS scrutiny
Lifetime gift to family	Removes the land from the estate	Very large estates facing estate tax	Heirs take the owner’s low basis and lose the step-up

*A note on land contracts: if part of the price is paid over time, the four-year option covers only the tax on gain recognized in the year of sale. It does not automatically extend to later payments under the contract.

**The options can also be combined. For example, an owner might sell part of the land under § 1062 and keep the rest for the step-up.

The covenant has practical costs of its own. A 10-year farming-only restriction removes developers and investors from the buyer pool. Near a growing town, that can mean a lower price. The buyer's lender and title company must also accept a recorded use restriction. Before choosing, compare the tax benefit with any loss in price. When the values are large, retain a state-certified appraiser to value the land both with and without the covenant, and to walk the family through the likely outcomes, risks, and rewards of each.

How to Capture It

If the four-year election fits your plan, the work happens before, at, and after closing. Missing a step can cost the election.

• Before Signing a Purchase Agreement:

• Gather Evidence:  Obtain proof of 10 years of farming use, for example through Schedule F returns, written farm leases, and Farm Service Agency records.  Obtaining an affidavit is easy, but it might be insufficient as proof.

• Determine Buyer Eligibility: Confirm that the buyer is an individual actively engaged in farming, and ask for a written representation in the contract. If the buyer wants to take title through an LLC or corporation, get advice first. The rules define a qualified farmer as an individual.  

• Get it in Writing: Get the buyer's written promise that the buyer does not plan to transfer the land to an unrelated non-farmer.  Have the buyer also agree to reimburse you for any added tax, interest, and penalties if that promise proves false.

• Stay Out of the Next Sale: The proposed anti-abuse rule disqualifies the buyer if, at closing, the seller, the buyer, and a third party already have a plan to move the land to an unrelated non-farmer. The written promise is not enough if the seller is on the side agreement.

• Get it Early: Raise the covenant early with the buyer, the buyer's lender and the title company.

• Do the Math: Have your tax advisor estimate the tax on the gain, the cost if the installments accelerate, and the cost of the covenant. Compare the election with a land contract and with holding the land. The election spreads only the payment of the extra federal income tax. The gain is still recognized in the year of sale, so that year’s income, not the later installment checks,— is what drives Medicare IRMAA, the net-investment-income-tax base, and how much of Social Security is taxable. Spreading the payments does not spread those hits.

• Update the Estate Plan of the Person Who Will Owe the Tax: A will, trust, and power of attorney should authorize the fiduciary to complete the election, file Form 1062, and pay any accelerated balance, including the balance that can come due at death. If a partnership or S corporation sells the land, the entity does not elect. Each partner or shareholder elects on that person’s share of the gain, and the entity only files Schedule A (Form 1062) and passes along the covenant. In that case, update the partner’s or shareholder’s documents, not just the entity’s.

• Before Closing: 

• Prove the buyer qualifies: Don't rely on the buyer's word. Ask for documents showing they are actively engaged in farming, such as FSA records, a recent Schedule F, or current farm leases. Put a copy in the closing file.

• Back the indemnity with something real:  A promise from a buyer who has no money left is worth little. On a large sale, consider holding back part of the price in escrow or asking for a personal guaranty.

• Make the Buyer's Qualification a Condition of Closing:  Closing should be conditioned on the buyer documenting qualified-farmer status and signing a recordable farming covenant. If either fails, the seller can walk away or renegotiate the price. 

• At closing:

• Recording: Record the 10-year farming covenant, either in the deed or as a separate instrument recorded no later than the deed.

• Recordkeeping: Keep a recorded copy for your tax return.

• After closing

• Tax Filing:  File Form 1062, its Schedule A, and a copy of the covenant with your return for the year of sale. If you extend the return, file the form by the extended due date.

• Payment: Pay the first 25% of the tax due by the return's original April due date (for calendar year filers). For others, the tax is due on the the original due date of the return for the year of sale, without extensions. A filing extension does not extend this payment.

• Management and Administration: Calendar the remaining three installments, and keep the funds for them separate and untouched.

• Plan for Death:  Death accelerates the bill. If an individual seller dies, the unpaid installments are due on the original due date of the final return, without extensions, not on the original four-year schedule and not on the date of death. For a C corporation, trust, or estate, a liquidation or a sale of substantially all assets can make the balance due on the date of that event. The will, trust, and power of attorney should authorize the fiduciary to finish the election and to pay that accelerated balance, and the liquidity plan should assume the rest of the tax can come due with the final return.

These rules are proposed, not final. Until final rules issue, follow the statute and the current Form 1062 instructions, and ask your advisors how the final version may differ.

The Bottom Line

Section 1062 is good news for farm families who want to sell to the next generation of farmers. It keeps land in agriculture and eases the cash strain of a large tax bill. It is not a tax cut, and it is not always the best choice for an older owner. Holding the land for the step-up, leasing it to a farmer, or combining strategies may serve the family better.

The decision touches taxes, Medicare, long-term-care planning, and the estate plan all at once. Talk with your attorney and tax advisor before you sign a purchase agreement, not after.

For advisors: comments on the proposed regulations are due November 30, 2026.

This article is general information, not legal or tax advice. The rules discussed are proposed and may change. Consult your own advisors about your situation.