Tax Tips: New Capital Gain Installment Provision for Qualified Farmland

By Ron Haugen, NDSU Extension Farm Management Specialist | July/August 2026

A new income tax provision (IRC §1062) under the One Big Beautiful Bill Act allows qualified farmland sellers to elect to pay their resulting federal capital gains taxes in four equal annual installments, providing significant cash-flow relief for farmers and agricultural landlords, rather than a single lump-sum tax bill in the year of sale.

State capital gain provisions still apply. Some states follow the federal code; others do not.

The new provision lets taxpayers selling “qualified farmland” to “qualified farmers” elect a four-year installment plan for the resulting tax. This is an alternative to traditional installment sales (IRC §453) and helps prevent liquidity crunches for landholders who would otherwise owe significant taxes before receiving all their sale proceeds.

The provision applies to sales taking place in tax years beginning after Dec. 31, 2025, with the first qualifying sales completing in calendar year 2026.

Eligibility

Qualified property

To qualify as "qualified farmland property" for this election, the sale must meet several statutory requirements:

• Real property and location: The land must be real estate located within the United States.
• 10-year farming history: The property must have been actively used as a farm by you (or leased to a qualified, active farmer) for substantially all of the 10-year period leading up to the sale.
• Mandatory use covenant: The property must be legally restricted, requiring it to remain in agricultural use for at least 10 years after the sale closes.
• Applicable assets: The election applies strictly to the real estate and permanent agricultural improvements. It does not cover livestock, machinery or equipment.
• No reinvestment necessary: Unlike a 1031 Exchange, the seller can receive full cash proceeds while still electing four annual payments.

Qualified buyer

To use the four-year deferral election (available even if the buyer pays the seller entirely in cash at closing), the purchaser must meet certain criteria:

• Qualified farmer: The buyer must be a "qualified farmer" actively engaged in the business of farming.
• Active use covenant: The buyer must legally agree to a covenant or restriction that prohibits the purchased land from being used for anything other than agricultural or farming purposes for at least 10 years following the sale.

Background: How it differs from traditional installment sales

An installment sale is a real estate transaction where the buyer pays the purchase price over time rather than in a single lump sum at closing. The seller receives at least one payment after the tax year in which the sale occurs, acting as the lender by carrying a promissory note. Capital gains are recognized on a pro rata basis as each installment payment is received from the buyer.

• Tax deferral: Spreading out capital gains can keep you in a lower tax bracket, preventing a massive, one-time tax hit that could result from a lump-sum payout.
• Passive income: It creates a predictable stream of income, which functions similarly to an annuity.
• Easier sales: It allows you to offer seller financing, which can help close deals in a tight credit environment.

Considerations

• Default risk: Because you are effectively the bank, if the buyer defaults on their payments, you may have to go through the repossession process.
• Reporting: You will need to file IRS Form 6252 in the year of the sale and for every year you receive installment payments to properly report your income.
• Eligibility: This method cannot be used if you are a real estate dealer selling property as regular inventory, or if the property was sold at a loss
• State provisions: State capital gain rules still apply.

Advantages and disadvantages

The new provision does not replace the traditional installment sale rules under IRC §453. Sellers can choose between the two or combine methods depending on individual circumstances.

A traditional installment sale requires the buyer to pay the seller over multiple years, with each year's payment generating proportional recognition of gain. The seller's tax liability tracks the buyer's payment schedule. The advantage is that the seller's tax aligns with the timing of actual cash receipts. The disadvantages are that interest income on the buyer's note is taxed annually at ordinary rates, and the seller bears credit risk on the buyer's future payments.

The new provision allows the seller to receive full cash payment at closing while still spreading the tax liability over four years. The advantages are no buyer credit risk on future payments and full investment of sale proceeds during the installment period. The disadvantages are the strict qualifying conditions (qualified farmer buyer, 10-year farmland history, 10-year covenant) and the fixed four-year installment period.

Triggers

The provision includes acceleration rules that require all unpaid installments to be due immediately upon certain events. Three triggers apply:

1) Failure to pay any installment promptly accelerates the remaining unpaid installments to the date of the missed payment.

2) An individual taxpayer's death accelerates unpaid installments to the due date for the return for the year of death.

3) Corporations, trusts or estate liquidations, asset sales or business cessations accelerate unpaid installments.

Contact a tax professional or the IRS for questions and further information.