The Internal Revenue Service proposed rules on Tuesday for an election Congress created in July 2025 in the One Big Beautiful Bill Act that taxpayers have had no way to use: paying the tax on the sale of farmland to a working farmer in four equal annual installments instead of one. The proposal runs 17 pages in the Federal Register and carries the docket number REG-117095-25. Comments are due Nov. 30 at the federal eRulemaking portal.
What the document sets out is narrower than the phrase tax break suggests, and more interesting. The election does not reduce the tax and does not postpone the gain. It postpones the payment, and it grants the postponement only when two conditions hold: the buyer has to be the person who farms the ground, and a restriction recorded against the deed has to keep the land in farming for ten years after the sale.
The election moves the payment date, not the gain
The amount that can be spread is the applicable net tax liability, which the statute and the proposal define as the difference the sale makes to the seller's tax for the year: net income tax with the gain, minus net income tax without it. Net income tax here means regular tax liability reduced by the credits allowed under subparts A, B and D of part IV of subchapter A. The proposal divides that figure into four payments of 25 percent each.
The first payment is due on the return's original due date, with no regard to extensions. A calendar-year individual who extends the filing to Oct. 15 still owes the first installment on April 15, and the proposal notes that the payment can come due before the election has been made on the return at all. Each of the next three installments follows with the return for the following year. The election is not a place the seller can wait and see. Once made, it can be undone only by paying everything still owed.
The deferral also stops at the edge of a financed sale. Only gain that is included in gross income and recognized in the year of the sale counts toward the deferrable amount, so a seller who takes back a note and reports the sale under the installment method of section 453 can spread the tax on the first year's gain but not on what arrives later. This election is for the seller who wants the cash at closing rather than a stream of payments from the buyer. That is the trade the provision offers, and the rest of the rules are about who is allowed to make it.
The buyer has to be the person who farms the ground
A qualified sale is one to a qualified farmer, which section 1062 and the proposal define as an individual who is actively engaged in farming within the meaning of the farm program payment eligibility rules at 7 U.S.C. 1308-1(b) and (c). A buyer who intends to rent the ground to someone else is not farming it, and the proposal closes the obvious version of that arrangement: a buyer is not treated as a qualified farmer if, under a plan or arrangement with the seller and a third party that exists when the sale closes, the property is later transferred to a person who is neither a qualified farmer nor a related person under section 267(b) or section 707(b)(1).
The seller's side carries its own ten-year test. The land must have been used by the seller as a farm for farming purposes, or leased by the seller to a qualified farmer, for substantially all of the ten years ending on the sale. A cash-rent tenant counts only if the tenant is a qualified farmer. Periods out of production are forgiven when the land is idled under a federal, state, tribal or local program, under recognized good farming practices such as laying fallow, or because of unforeseen events, so long as the land is still maintained for farming. Land bought during the ten years can carry over the use made of it by the previous owner in a like-kind exchange or another transaction where the holding period tacks, and an heir can count the decedent's years. Residential buildings and improvements count as farm use. Property that is only partly farmed, or only partly covered by the covenant, counts only in that part, and the seller has to allocate basis and proceeds between the two.
The covenant is recorded against the land and runs with it
The condition that gives the election its shape is the section 1062 covenant. It has to prohibit any use other than a farm for farming purposes for ten years after the sale. It has to be executed at or before closing, recorded in the land records office before or at the same time as the deed, and enforceable against the buyer and later owners from the date of the sale. And it has to "run with the land" for at least ten years, which is the phrase the proposal uses for a restriction that binds whoever holds title next. An easement or an equitable servitude with similar attributes can serve.
The covenant is also a filing, and the filing is unforgiving. The taxpayer has to attach a copy to the return for the year of the sale. Under the proposal, missing that step means the property is not qualified farmland property, which means the sale does not qualify for the election at all. There is no partial credit for a seller who recorded the restriction correctly and left the paper out of the return.
Death, a missed payment or a liquidation brings the rest forward
Four years of deferral last that long only if nothing changes in between. The proposal lists the events that accelerate everything still unpaid. An addition to tax for failing to pay an installment on time makes the balance due on the date the addition is assessed. The death of an individual seller makes it due with the return for the year of death, again without extensions. A trust or an estate that liquidates or disposes of substantially all of its assets, including in a bankruptcy case, faces the balance the day before the petition is filed. For a C corporation, liquidation or a disposition of substantially all assets, a cessation of business, or entry into or exit from a consolidated group are all triggers. An S corporation with an entity-level liability from the sale is treated as a C corporation for these purposes, which reaches the built-in gains tax.
The proposal provides one way out. When the acceleration event is a sale of substantially all the transferor's assets, a buyer that is a single United States person, not a partnership or an S corporation, not a debtor in bankruptcy and not insolvent can assume the remaining payments. The two sides file a transfer agreement on Form 1062-T, generally within 30 days of the event, signed under penalties of perjury. The Commissioner can request information about the buyer's ability to pay, and a material misrepresentation or omission allows the agreement to be rejected back to the date of the acceleration event.
Death is the trigger that matters most for the estate planning this election is meant to serve, because the deferral does not survive the seller. The remaining tax comes due with the final return, and the heirs inherit land that is still under the covenant without the payment schedule. The proposal does allow an election to be made after an acceleration event when that event is the taxpayer's death, but the permission covers the filing, not the continuation.
Owners can lose the election at the entity's desk
When the seller is a partnership or an S corporation, the election belongs to the partners or shareholders, and the proposal builds a chain of paperwork the entity has to complete for them to use it. The entity files a Schedule A (Form 1062), not the Form 1062 itself, and has to give a copy of the schedule and of the covenant to each owner. An owner that is itself a pass-through has to forward both further up. The entity also has to report each owner's share of the gain on the Schedule K-1. If the entity fails any of those steps, its owners are not eligible to make the election for the gain it allocated to them, which puts the benefit in the hands of a filing the owner does not control.
The rules keep the entity and its owners separate in both directions. An entity can elect only for its own applicable net tax liability, as a trust taxed on part of the gain or an S corporation facing the built-in gains tax can, and an owner can elect only for the owner's share. Neither can elect on the other's behalf. Trusts and estates are pass-throughs for this purpose, while disregarded entities and grantor trusts are not, because the sale is treated as the owner's from the start. Real estate investment trusts, regulated investment companies and bankruptcy estates under section 1398 are excluded from the definition, and inside a consolidated group it is the group's agent that makes the election.
The first elections arrive with the 2026 returns
The statute applies to sales in tax years beginning after July 4, 2025, so for a calendar-year seller the earliest eligible sales are this year's, and the first elections will ride on returns due April 15, 2027. That date is also the deadline to elect, since section 1062(c)(1) requires the election no later than the return's due date, and it is the date the first installment is payable. Because the regulations are still proposed, Treasury added a reliance rule: taxpayers can follow the proposal for sales in tax years that began after July 4, 2025 and end before the regulations are finalized, provided they comply with it in its entirety and consistently.
The estimated tax problem already has an answer. The IRS addressed it in Notice 2026-3: a taxpayer may exclude 75 percent of the applicable net tax liability from the required annual payment used to calculate estimated tax for the year of the sale, while the 25 percent payable with the return stays in the calculation. The waiver applies on its own to a taxpayer who qualifies and does not self-report an addition to tax; anyone who has already reported one can request abatement on Form 843. An acceleration of the installment dates does not disturb the waiver.
The design carries its own argument. Congress could have written a plain deferral for farm sales and left land use alone. Instead the timing benefit is available only when the buyer will work the ground and the deed carries a restriction that follows the land for a decade, and it collapses early if the seller dies, misses a payment, or holds the land through an entity that liquidates. The election is a payment plan bought with a commitment about what the land will be used for, and anyone selling qualifying land this year will be reading the proposed rules for the shape of the return they file in 2027.
Primary sources
- Internal Revenue Service, Election To Pay in Installments Tax on Gain From Certain Farmland Property, notice of proposed rulemaking, 91 FR 61367, Sept. 29, 2026, FR Doc. 2026-19888, docket REG-117095-25, for the statutory background, the definitions of qualified farmland property and qualified farmer, the section 1062 covenant requirements, the election mechanics and installment dates, the pass-through and consolidated group rules, the acceleration events and the eligible transferee exception, and the proposed applicability date and reliance rule.
- Section 1062 of the Internal Revenue Code, Gain from the sale or exchange of qualified farmland property to qualified farmers, as enacted by section 70437(a) of the One Big Beautiful Bill Act, Pub. L. 119-21, 139 Stat. 72, 248-250 (July 4, 2025), for the election, the installment and proration rules, the acceleration provisions and the statutory definitions.
- Internal Revenue Service, Notice 2026-3, Relief from Additions to Tax under Sections 6654 and 6655 for Underpayment of Estimated Income Tax by Taxpayers Making an Election under Section 1062, for the 75 percent exclusion from the required annual payment and the abatement procedure.
- Internal Revenue Service, Instructions for Form 1062, for the forms on which the election and a transfer agreement are made: Form 1062, Schedule A (Form 1062) and Form 1062-T.