The One Big Beautiful Bill has led to a number of interesting changes to the tax code. One of which is the addition of 26 U.S. Code § 1062, which adds a mechanism to defer some tax on the income from the sale of real property used as farmland. Through this statute, qualified farmers can sell qualified farmland and split the tax from the sale into four equal annual installments. The first installment will be paid when taxes are due for the year of the sale, and the subsequent three installments will be paid in each of the three years after the sale.
What are the Qualifications for § 1062?
The statute requires specific criteria to be met by both the real property being sold and the buyer of the real property.
The buyer must be a Qualified Farmer, defined as an individual “actively engaged in farming” under the U.S. Code. For the exact definition of a Qualified Farmer, see 7 U.S.C. 1308–1(b) and (c).
The real property being sold must be Qualified Farmland Property. To be qualified, the real property must be in the U.S., and must have been used for farming purposes by the seller (or leased to a qualified farmer for farming purposes) for “substantially all of the 10-year period ending on the date of the qualified sale.” For the exact definition of “farming purposes, see 26 U.S.C. 2032A(e)(5). The IRS has not yet released guidance on what “substantially all” means in the context of the 10-year period.
Further, a covenant or other legally enforceable restriction that prohibits the use of the real property for any purpose other than as a farm for farming purposes must be placed on the real property before the date of the sale or exchange of the real property and last at least 10 years after such sale or exchange.
The Benefit of a § 1062 Election
The major benefit of this new tax election is the ability to defer some of the taxes on the gain of the sold farmland. A quarter of the tax must be paid in the year of the sale on the normal due date; however, the other three quarters can be split across the next three years. There is also no interest due on these deferred tax payments. However, subsequent tax payments must be paid on time. If they are not, then the entire tax becomes immediately due.
Who Does This Benefit?
The § 1062 Election requires the sale or exchange to be to a qualified farmer and involve farmland. As such, this election is primarily intended to benefit farmers and those who own farmland. If considering this election, bear in mind that the real property must have been used for farming for at least 10 years prior to the sale and must continue to be used for farming for at least 10 years after the sale.
If you have questions or would like to explore whether a § 1062 election is appropriate for your situation, our attorneys are ready to assist.
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