Farmland Sale Tax in 4 Installments: Section 1062 Rules 2026

What the law gives you, and what it does not

Section 1062 was added by section 70437 of Public Law 119-21, signed July 4, 2025. The earlier section 1062 was renumbered section 1063. The election is not a deferral of the gain and not a deferral of the whole bill. Three limits matter:

• Federal income tax only. The statute speaks of “net income tax,” which it defines as the regular tax liability reduced by the credits in subparts A, B and D of part IV of subchapter A. Form 1062 line 2 adds the additional regular taxes in section 26(b)(2). Whether other taxes that sit on the return, such as the net investment income tax, are in or out is not spelled out in the documents we read, so we leave it as not verified. State income tax is outside the statute.
• Only the extra tax caused by the sale. The liability is the net income tax with the gain minus the net income tax with the gain taken out. Tax on your other income stays due on its normal dates.
• The money is yours, the tax schedule is the IRS’s. You receive the price at closing (unless you finance the buyer), but the 4-installment schedule is fixed. Nothing in the statute or the proposed regulations that we read gives an interest rate for the installments, so the cost of the delay is not stated in those texts. A late installment that draws an addition to tax triggers the acceleration rule below.

Source: 26 U.S.C. 1062 (Legal Information Institute text, read October 31, 2026), the proposed regulations in 91 FR 61367 (September 29, 2026), and the Instructions for Form 1062 (12-2025). A calendar-year 2025 taxable year began January 1, 2025, which is before July 4, 2025, so we read 2026 as the first year a calendar-year seller can use; a fiscal-year taxpayer whose year began after July 4, 2025 can use it earlier (our reading of the effective-date sentence).

Which land qualifies

The statute and the proposed regulations ask three questions about the property, in this order.

1. Where is it? Real property located in the United States.
2. What was it used for? For substantially all of the 10 years ending on the sale date, you used it as a farm for farming purposes or leased it to a qualified farmer for farming purposes. “Farm” and “farming purposes” take their meaning from section 2032A(e), the estate-tax special-use rules. The Form 1062 instructions list livestock, dairy, poultry, fruit, nursery, orchard and woodland operations among farms.
3. What is attached to it? A covenant or other legally enforceable restriction that bars any non-farm use for the 10 years after the sale.

The proposed regulations then answer the questions a reader would ask about a 10-year look-back:

Source: 91 FR 61367-61383 (September 29, 2026), Explanation of Provisions part II.A and proposed 1.1062-1. These are proposed rules and can change before they are final. Our companion guides on the 1031 exchange rules and stepped-up basis on inherited property cover the two ways land often arrives during the look-back.

What the covenant has to say, and when

The proposed definition of a “section 1062 covenant” has five parts: it prohibits any use other than as a farm for farming purposes for the 10 years after the sale; it is executed before or at closing; it is recorded in the land records before or with the filing of the deed; it is enforceable against the buyer and later owners from the sale date; and it runs with the land for at least 10 years. An easement or similar interest can serve if state law gives it the same effect. The practical meaning, in our reading, is that the buyer’s lawyer has to agree to the restriction before closing, so it belongs in the purchase contract, not in the tax return conversation in April.

The list of acceleration events in the proposed regulations does not include a breach of the covenant by the buyer. We read that as meaning a later violation is not a listed trigger for the seller’s remaining installments, but the proposal does not say so in terms, so ask the preparer.

Who counts as a buyer

The buyer must be a “qualified farmer,” defined in section 1062(d)(3) as an individual actively engaged in farming within 7 U.S.C. 1308-1(b) and (c). Those subsections, in the farm-program payment-limit statute, say a person is actively engaged if he or she makes a significant contribution of capital, equipment or land, and of personal labor or active personal management, to the operation, with a profit share commensurate with those contributions. A landowner who contributes land can also qualify if the rent or income is based on production or operating results.

Source: 26 U.S.C. 1062(d)(3); 7 U.S.C. 1308-1(b) and (c) (Legal Information Institute text, read October 31, 2026); proposed 1.1062-1(p) and Examples 3 and 4. The last two rows are our reading of the definitions. Notice 2026-3 adds that the section 1062 “qualified farmer” differs from the “farmer or fisherman” of section 6654(i), which turns on 66 and 2/3 percent of gross income.

For a reader who invests in farmland through a platform or a listed REIT, the point is a boundary: a sale to an entity of that kind is not the sale the statute describes. Our farmland investing guide covers those buyers and their own filings.

How the election is made, and the Form 1062 arithmetic

The election is made on Form 1062, with a separate Schedule A (Form 1062) and a copy of the covenant for each qualified sale, all filed with the income tax return. The December 2025 form and its instructions are already published; the form is not waiting for the final regulations. The proposed regulations name the same form and a Form 1062-T for the transfer agreement described below.

Part I of the form works out the net income tax including the gain (line 5). Part II re-computes the tax with the gain removed (line 13). Line 14 is the difference, the total applicable net tax liability, and line 15 is 25% of it: the first installment. Schedule A line 13 is the gain: net sales price minus adjusted basis.

A worked case (our arithmetic)

The numbers below are made up to show the mechanics; they are not a tax calculation. A calendar-year individual sells qualified farmland to a qualified farmer in 2026. The 2026 return shows a net income tax of $620,000 with the gain (Form 1062 line 5) and $180,000 with the gain taken out (line 13).

Source: Form 1062 (December 2025) lines 5, 13, 14 and 15; IRS Notice 2026-3 section 4.02; 26 U.S.C. 1062(b). The first due date follows the proposed regulation’s example of a calendar-year individual, April 15, adjusted in practice when that falls on a weekend or holiday.

Notice 2026-3 explains the concern: without relief, a seller might have to pay all or most of the liability as estimated tax during the year of sale, which would defeat the installments. The notice waives the part of the section 6654 and 6655 additions to tax that comes from the deferred amount, applies automatically if you do not self-report a penalty, and can be claimed afterward on Form 843 marked “Abatement requested pursuant to Notice 2026-3.” Acceleration of the installments does not take the waiver away.

Partnerships, S corporations, trusts and estates

Many farms are owned through entities, so this is where the proposed regulations do the most work.

• Partnerships and S corporations do not elect. The election is made by each partner or shareholder with his or her own applicable net tax liability. The entity files only Schedule A (Form 1062), gives each owner a copy plus the covenant, and reports each owner’s share of the gain on the Schedule K-1 (code ZZ in box 20 of Form 1065 or box 17 of Form 1120-S, per the form instructions). If the entity skips these steps, its owners are ineligible (proposed 1.1062-2(b)(2)(iv)).
• Trusts and estates that pass gain through to beneficiaries are treated as pass-through entities, so a beneficiary can elect for his or her own share, and the trust or estate can elect for any entity-level tax. A disregarded entity or a grantor trust is looked through to its owner.
• REITs and regulated investment companies are expressly outside the proposed definition of a pass-through entity, so owners of those vehicles do not appear to have the pass-through route (our reading).
• C corporations, trusts and estates face extra acceleration events: liquidation, sale of substantially all assets, cessation of business (C corporations), joining or leaving a consolidated group. A buyer of substantially all the assets can step into the remaining installments by filing a transfer agreement within 30 days (Form 1062-T), if that buyer is one U.S. person that is not a partnership, S corporation, debtor in bankruptcy or insolvent person.
• Sellers living abroad or in military service get a later due date for installments: the 15th day of the sixth month after the close of the prior taxable year.

Treasury and the IRS estimate that about 1.9 million small entities, from 2023 filing data, may qualify to make the election, and say fewer will be affected. They put the burden of the election at $237.40 or 8.45 hours per entity. They expect about 1,030 respondents a year to use the transfer-agreement exception, at 3 hours 12 minutes each. These are agency estimates in the proposal, not counts of sales.

Section 1062 next to the other tools

Source: 91 FR 61367-61383, proposed 1.1062-2(g) Examples 5 and 6 and 1.1062-1(x) Example 2; 26 U.S.C. 1062. The descriptions of sections 453, 1031, 121 and 6166 are our summaries and are covered in the linked guides.

What a reader can do with this

• Check the calendar first. If the sale closed in 2025 and you file on a calendar year, the effective-date sentence appears to put it outside section 1062. A 2026 closing is inside it. Confirm with your preparer if your tax year is not the calendar year.
• Write the 10-year story. For each parcel, list who farmed it or leased it, in which years, and any fallow, program or disaster years. If you swapped into the land or inherited it, note the earlier owner’s years, which the proposal lets you count.
• Put the covenant in the contract. The restriction has to be signed by closing, recorded with the deed and bind later owners. Ask the buyer’s side early, because it limits what the buyer can do with the land for 10 years.
• Test the buyer. An individual who actively farms is the clean case. If the buyer is an entity or plans to resell, get the answer on paper before closing.
• Run Form 1062 on a draft return. Lines 5, 13 and 14 show the real number. Do it before you set the price or decide on seller financing.
• Calendar the unextended due dates. Four payments, each on the original due date of the return, even if you extend the filing.
• Plan the estate side. If the seller dies, the unpaid installments come due on the return for the year of death. A seller in poor health may weigh that against paying the tax in full.
• Watch the proposal. The regulations are proposed, with comments due November 30, 2026, and the rules on entities, trusts and the transfer agreement could change in the final version. Taxpayers may rely on the proposal for sales in earlier years if they follow it in full.

Who decides

Whether your land passes the 10-year test, how the covenant should be drafted under your state’s law, and whether the buyer is a qualified farmer are legal and tax questions that need to be settled before closing. The people who handle them are a tax adviser who prepares the return and a real estate or agricultural lawyer. An adviser who looks at the whole sale can help line up the covenant, the tax cash and the filing dates.

FAQ

Sources, read and saved on October 31, 2026: 26 U.S.C. 1062 and 7 U.S.C. 1308-1 (Legal Information Institute, Cornell Law School); Treasury and IRS, “Election To Pay in Installments Tax on Gain From Certain Farmland Property,” proposed rule REG-117095-25, FR Doc 2026-19888, 91 FR 61367 (September 29, 2026), including proposed 26 CFR 1.1062-1, 1.1062-2 and 1.1062-3 and the Paperwork Reduction Act and Regulatory Flexibility Act sections; Form 1062 (Rev. December 2025) and Instructions for Form 1062 (12-2025, dated April 10, 2026), irs.gov; IRS 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,” irs.gov. Our figures and the worked case are arithmetic on those sources and are labelled as such. This is analysis of public documents, not investment, legal or tax advice.