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DEEPYIELDTAX STRATEGIES

Selling Farmland to a Farmer: The Section 1062 Election to Pay the Tax in Installments

Short answer: Section 1062 of the Internal Revenue Code, added by section 70437 of Public Law 119-21, lets you elect to pay the income tax on the gain from selling qualified farmland property to a qualified farmer in four equal annual installments, starting with the year of the sale. It changes when the tax is paid. It doesn't reduce the tax. The land must have been farmed by you, or leased by you to a qualified farmer, for substantially all of the 10 years before the sale. The buyer must be an individual actively engaged in farming. And the land must be subject to a covenant or other legally enforceable restriction that bars any use other than farming until 10 years after the sale, which binds the buyer. You make the election on Form 1062, attached to your return with a Schedule A for each sale and a copy of the covenant. This page covers what to check before and after a sale like this.

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1. What the election does, and what it doesn't

Section 1062(a) says that, at the election of the taxpayer, the portion of the net income tax for the year of the sale that equals the "applicable net tax liability" "shall be paid in 4 equal installments." The applicable net tax liability is the difference between your net income tax for the year and your net income tax figured without the gain from the sale. The statute defines net income tax as "the regular tax liability reduced by the credits allowed under subparts A, B, and D" of the credit rules. Form 1062 walks through that math: regular income tax, minus the foreign tax credit, nonrefundable personal credits, general business credits and certain other credits, figured once with the gain and once without it.

What it doesn't do:

  • It doesn't lower the tax. The gain is still taxed in the year of the sale. The election only spreads the payment of the tax on that gain over four years. The Internal Revenue Bulletin's summary of Notice 2026-3 calls it "a new limited payment deferral election."
  • It covers only the tax the statute defines. That is the regular income tax on the gain, net of those credits. Ask your CPA which other amounts on your return aren't part of it.
  • Interest isn't addressed. Section 1062, the Form 1062 instructions and the proposed regulations don't address interest on the installments, so ask your CPA how that works for you.

What to check: whether the sale is large enough, compared with the rest of the year's income, that the timing of the payment matters to you, and whether you'd rather pay the tax in the year of the sale anyway. The election is optional.

2. When it starts, and what the IRS has issued

Section 70437(c) says the new rule applies "to sales or exchanges in taxable years beginning after the date of the enactment of this Act," and P.L. 119-21 was approved July 4, 2025. For someone whose tax year is the calendar year, the first tax year that begins after that date is 2026. The 2025 Form 1040 instructions say the same thing in their own words: "If your tax year began after July 4, 2025, and you sold or exchanged qualified farmland to a qualified farmer after that date, you can elect" the installments.

The IRS has issued Form 1062, Schedule A (Form 1062) and the Instructions for Form 1062 (all dated December 2025), and Notice 2026-3 on estimated tax. On September 29, 2026, Treasury and the IRS published proposed regulations (REG-117095-25). Proposed regulations aren't final and may change. The preamble says taxpayers may rely on them for sales in a tax year beginning after July 4, 2025, and ending on or before the date the final regulations are published, "provided that the taxpayers comply with these proposed regulations in their entirety and in a consistent manner." This page notes where a point comes from the proposed regulations rather than the statute.

What to check: the date of the sale against your tax year, and whether your CPA is working from the proposed regulations or the statute and instructions alone.

3. Which land qualifies

Section 1062(d)(2) defines qualified farmland property as real property located in the United States that:

  • has been used by you as a farm for farming purposes, or leased by you to a qualified farmer for farming purposes, "during substantially all of the 10-year period ending on the date of the qualified sale or exchange," and
  • is subject to the covenant described in section 5 below.

A few more points:

  • Partnerships and S corporations. Land used or leased by a partnership or S corporation is treated as used or leased that way by each person who holds a direct or indirect interest in it.
  • What counts as a farm. The statute borrows the definitions of "farm" and "farming purposes" from the special-use valuation rules in section 2032A(e). The Form 1062 instructions list them: a farm includes livestock, dairy, poultry, fruit, fur-bearing animal and truck farms, plantations, ranches, nurseries, ranges, greenhouses and similar structures, and orchards and woodlands. Farming purposes include cultivating the soil, raising or harvesting crops, raising and caring for animals on a farm, handling and storing commodities in certain cases, and planting, caring for or cutting trees.
  • Time out of production (proposed regulations). Land wouldn't fail the 10-year test for periods when it's taken out of production under a government program, under recognized good farming practices such as laying fallow, or because of events outside your control such as natural disasters, if the necessary functions to maintain it for farming continue.
  • Inherited or exchanged land (proposed regulations). If you acquired the land within the 10 years, the proposed regulations would let you count years in which the person you inherited it from farmed it or leased it to a qualified farmer. For land received in certain exchanges or other transactions where your holding period carries over, they would count the use of the land you gave up, or the prior owner's use.
  • Part of a tract (proposed regulations). If only part of the land is used for farming, or only part is covered by the covenant attached to the return, only that part would be qualified farmland property.

What to check: who actually used or leased the land in each of the last 10 years (you, your entity, a person you inherited it from, or someone else), what it was used for, and whether any period out of production fits one of the listed reasons.

4. Who the buyer has to be

Section 1062(d)(3) says a qualified farmer is "any individual who is actively engaged in farming," within the meaning of 7 U.S.C. 1308-1(b) and (c), the farm program payment rules. Under 7 U.S.C. 1308-1(b), a person is generally actively engaged in farming if the person makes a significant contribution to the farming operation of capital, equipment or land, and of personal labor or active personal management; the person's share of profits or losses is commensurate with those contributions; and the contributions are at risk. Section 1308-1(c) adds special classes, including certain landowners whose rent or income depends on the land's production or the operation's results, adult family members in family operations, and sharecroppers.

The proposed regulations add one limit: a buyer isn't treated as a qualified farmer if, under a plan or arrangement between the seller, the buyer and a third party existing at the time of the sale, the land is later transferred to someone who is neither a related person nor a qualified farmer.

Schedule A (Form 1062) asks the seller directly: "Did you make the sale or exchange to a qualified farmer, an individual who is actively engaged in farming?"

What to check: what you know about the buyer's farming operation at closing, whether the buyer is an individual rather than an entity, and whether there's any plan for the land to move on to someone else.

5. The covenant, and what it means for the buyer

This is the condition that reaches past the seller. Section 1062(d)(2)(A)(ii) requires the land to be "subject to a covenant or other legally enforceable restriction which prohibits the use of such property other than as a farm for farming purposes for any period before the date that is 10 years after the date of the sale or exchange." In plain terms, the buyer takes land that, by its own recorded terms, can be used only as a farm for 10 years.

  • Who it binds. The statute requires a legally enforceable restriction. The proposed regulations spell out five requirements: the covenant must bar non-farm use for that 10-year period; be executed before or at closing; be recorded in the local land records office no later than the deed; be enforceable against the buyer and all future owners from the date of the sale; and not stop being enforceable against them before the 10 years end. In other words, it would "run with the land." An easement or similar interest, such as an equitable servitude, can count.
  • If it's broken. The enacted text doesn't say what happens to the seller's election, or to the buyer, if the land is later used for something else. The events that make the remaining installments due early under section 1062(b)(2) are a late installment, the seller's death, and certain events for a corporation, trust or estate; a breach of the covenant isn't one of them, the proposed regulations' list of acceleration events doesn't add it, and the proposed regulations don't otherwise address a breach. What happens when a buyer or a later owner breaks the restriction depends on the covenant's own terms and on state law, which is why your attorney drafts the covenant.
  • What it means for the sale. A 10-year farm-use restriction and a buyer who must be an individual actively engaged in farming can change who is willing to buy and on what terms. That's a conversation for you, your realtor and your attorney before the land is listed.
  • The copy goes with the return. Section 1062(e) requires a copy of the covenant with the return for the year of the sale. Under the proposed regulations, if the copy isn't attached, the land isn't qualified farmland property.

What to check: that the covenant is signed by closing, recorded with or before the deed, covers the whole tract you're treating as qualified, runs for the full 10 years, and that a copy is in your tax file for the year of the sale.

6. How the four installments are paid

  • First installment. Section 1062(b)(1) says it's due on the return due date for the year of the sale, "determined without regard to any extension of time for filing the return." The Form 1062 instructions add that it's due by that date "even if the election is made on a return filed by the extended due date." Form 1062, line 15, is one-quarter of the total applicable net tax liability on line 14.
  • The next three. Each is due on the return due date, again without extensions, for each of the three following years.
  • On Form 1040. The 2025 Form 1040 instructions say to enter three-quarters of the applicable net tax liability from Form 1062, line 14, on Schedule 3, line 13z, identified as "1062NL."
  • When the rest comes due early. Under section 1062(b)(2), if there's an addition to tax for failing to pay an installment on time, all remaining installments are due on the date of that failure. If an individual seller dies, the rest is due on the due date of the return for the year of death. For a C corporation, trust or estate, a liquidation, a sale of substantially all its assets, or (for a C corporation) a cessation of business makes the rest due on the date of that event, with an exception when the buyer of those assets agrees with the IRS to take over the remaining installments.
  • If the IRS later finds more tax. A deficiency on the applicable net tax liability is spread over the installments, with the parts already due payable on notice and demand. That spreading doesn't apply if the deficiency is due to negligence, intentional disregard of rules and regulations, or fraud.

What to check: the due date of each of the four installments, how they'll be paid, and who in the family or the business knows about them if the seller dies.

7. Estimated tax in the year of the sale

Notice 2026-3 gives limited relief from the estimated tax penalty for a taxpayer who properly makes the election. For the year of the sale, you may leave three-quarters of the applicable net tax liability out of your required annual payment, but you must include the one-quarter that's paid with that year's return. Publication 505 (2026) says the same. The notice says the waiver applies automatically to a taxpayer who qualifies and doesn't self-report the penalty, and that a taxpayer who already reported the penalty, or who gets a penalty notice, can request abatement on Form 843 by noting "Abatement requested pursuant to Notice 2026-3" at the top. Our page on estimated tax for farmers covers the regular rules (link below).

What to check: whether the estimated payments for the year of the sale were figured with the election in mind, and whether any penalty was reported or billed anyway.

8. Partnerships, S corporations, trusts and estates

Section 1062(c)(2) says that when a partnership or S corporation sells the land, the election is made at the partner or shareholder level. The Form 1062 instructions say the entity doesn't file Form 1062. It files Schedule A (Form 1062) with its own return and reports each owner's share of the gain on Schedule K-1 (Form 1065, box 20, or Form 1120-S, box 17, code ZZ, with a statement), and gives owners a copy of its Schedule A and the covenant. Each owner who elects files Form 1062 and a separate Schedule A. The IRS news release on the proposed regulations says similar rules would apply when gain passes through a trust or estate to a beneficiary.

What to check: whether the entity's Schedule A, the K-1 statement and the covenant reached each owner in time to decide.

9. Installment sales and a farmhouse on the land

  • Seller financing. Schedule A (Form 1062) asks whether the transaction was an exchange, an installment sale or a sale. Under the proposed regulations, only gain included in income and recognized in the year of the sale counts. If you report the sale on the installment method, the election would cover only the tax on the gain recognized in the year of the sale, not gain reported in later years.
  • A home on the land. The proposed regulations treat residential buildings and related improvements described in section 2032A(e)(3) as used for farming purposes. If part of the gain on a farmhouse is excluded from income under section 121, only the gain actually included in income counts.

What to check: how the sale is reported (all in the year of the sale or on the installment method), and whether any part of the gain was excluded.

10. How the election is made

The Form 1062 instructions say to attach Form 1062, a Schedule A (Form 1062) for each qualified sale, and a copy of each section 1062 covenant to your income tax return, and to file "by the due date (including extensions) for that return." Schedule A asks five yes-or-no questions (10-year use, U.S. real property, qualified farmer buyer, covenant, copy attached); if any answer is no, the instructions say the sale doesn't qualify. Notice 2026-3 adds that "Forthcoming guidance will provide further instructions on how a taxpayer may properly make a section 1062 election." The proposed regulations would add rules on the information needed to make the election (proposed section 1.1062-2(b)).

11. What to check before and after the sale

  • Ten years of use: who farmed or leased the land each year, to whom, any years out of production, and, if you inherited the land or received it in an exchange, the earlier owner's use.
  • The buyer: an individual actively engaged in farming, and no plan for the land to pass to someone who isn't.
  • The covenant: drafted by your attorney, signed by closing, recorded with the deed, covering the whole tract, running 10 years against the buyer and later owners.
  • Your basis in the land and any improvements, so the gain on Schedule A, lines 9 through 13, is right. If you inherited the land, see our page on inherited farmland basis.
  • How the sale is reported: all in the year of the sale or on the installment method.
  • Form 1062, a Schedule A for each sale, and the covenant copy, attached to the return by its due date including extensions.
  • The first installment, paid by the regular due date without extensions, and the three later ones on the calendar.
  • Estimated tax for the year of the sale, figured under Notice 2026-3.
  • For a sale by a partnership or S corporation: the entity's Schedule A and K-1 statement, and each owner's own Form 1062.

Where DeepYield fits

DeepYield is a second set of eyes, not a replacement for your CPA. A free two-year look-back is a review of your last two years of tax returns, done for you, then a 30-minute call to walk through what we found. For a farmland sale, that means looking at how the land has been used and reported on your returns, your basis records, and how any entity that owns the land reports it, so you and your CPA can see what section 1062 would need before a sale. Your attorney drafts the covenant, and you and your CPA decide whether to make the election. We go looking for what's missing, and we share what we see with you and your CPA. Sometimes the review ends with nothing to change.

Related: Inherited Farmland: Basis and Depreciation Questions, Answered · Buying a Ranch or Farmland: Tax Questions to Raise Before Closing · How Estimated Tax Works for Farmers and Ranchers · Farmland Purchase Price Allocation: How to Split Land From Improvements · Year-End Tax Planning for Farmers and Ranchers: Questions to Work Through With Your CPA

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Frequently asked questions

What is the section 1062 election?

It lets a seller pay the income tax on the gain from selling qualified farmland property to a qualified farmer in four equal annual installments, starting with the year of the sale. It was added by section 70437 of Public Law 119-21. It changes when the tax is paid; it doesn't reduce the tax.

Does the section 1062 election reduce the tax on a farmland sale?

No. The gain is still taxed in the year of the sale. The election only lets you pay the net income tax on that gain, meaning regular income tax reduced by certain credits, in four equal installments instead of all at once.

When does the section 1062 election start?

It applies to sales or exchanges in tax years beginning after July 4, 2025. For someone whose tax year is the calendar year, that means sales in 2026 or later.

What land qualifies for the section 1062 election?

Real property in the United States that you used as a farm for farming purposes, or leased to a qualified farmer for farming purposes, during substantially all of the 10 years ending on the sale date, and that is subject to a covenant or other legally enforceable restriction barring any use other than farming until 10 years after the sale.

Who counts as a qualified farmer buyer?

An individual who is actively engaged in farming within the meaning of 7 U.S.C. 1308-1(b) and (c). Generally that means the person makes a significant contribution of capital, equipment or land and of personal labor or active personal management, shares in profits or losses in line with those contributions, and has those contributions at risk.

What does the section 1062 covenant mean for the buyer?

The land must be subject to a legally enforceable restriction that prohibits any use other than as a farm for farming purposes until 10 years after the sale. The proposed regulations would require it to be recorded and enforceable against the buyer and all future owners for those 10 years. The statute doesn't list a breach among the events that speed up the installments, so what happens if it's broken depends on the covenant's terms and state law. Your attorney drafts it.

When are the installments due?

The first is due by the return due date for the year of the sale, without extensions, even if the election is made on an extended return. The other three are due by the return due dates, without extensions, for each of the next three years. A late installment, the seller's death, or certain entity events can make the rest due early.

How do I make the section 1062 election?

Attach Form 1062, a Schedule A (Form 1062) for each qualified sale, and a copy of each covenant to your income tax return, filed by its due date including extensions. For a sale by a partnership or S corporation, each partner or shareholder makes their own election.

Sources

Results depend on your specific facts. No outcome is guaranteed. This is general information, not tax advice; advice is provided only under a signed engagement.

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