Farmland sellers can pay capital gains tax over 4 years

The One Big Beautiful Bill Act creates a new tax payment election for farmland sellers under Section 70437. The provision adds Internal Revenue Code Section 1062, which lets a taxpayer who sells qualified farmland property to a qualified farmer elect to pay the resulting federal income tax in 4 equal annual installments rather than in a lump sum in the year of sale. The provision applies to sales taking place in tax years beginning after December 31, 2025, with the first qualifying sales completing in calendar year 2026.

For aging farmers preparing to transition land out of operation, agricultural landlords selling to actively farming buyers, and trustees managing inherited farmland, the installment election provides a real cash-flow benefit. A landowner facing a $400,000 federal capital gains tax bill on a $2 million land sale can now spread that tax over four years instead of writing one check on the original return due date. The economic value of the four-year deferral, in typical interest-rate environments, is roughly equivalent to a 5% to 8% reduction in the present value of the total tax liability.

This article walks through what Section 70437 actually requires, who qualifies as a "qualified farmer" buyer, the 10-year farmland-use restriction that anchors the provision, dollar-level scenarios showing the cash-flow impact, and how the new election interacts with traditional installment sales and broader farm succession planning.

What Section 70437 establishes for farmland sales

Before OBBBA, farmland sellers had only the standard installment sale rules under IRC Section 453 to spread tax over multiple years. Those rules require the buyer to make payments over multiple years, with the seller reporting gains in proportion to the payments received. Section 453 requires a buyer financing element. A seller who paid in full at closing cannot use Section 453 to defer tax; the entire gain is recognized in the year of sale.

Section 70437 creates a fundamentally different election. The seller can elect to pay the federal income tax on the gain in 4 equal annual installments even when the sale closes for cash with no buyer financing. The buyer-side cash flow can be a single closing payment, while the seller-side tax payment is divided across four federal income tax filings. This decouples the timing of tax liability from the underlying transaction's cash mechanics.

Three core mechanics define the new election:

1. The election is available only when the buyer is a "qualified farmer" actively engaged in farming
2. The farmland sold must be "qualified farmland property" used or leased for farming for substantially all of the 10 years preceding the sale.
3. The property must be subject to a covenant or other legally enforceable restriction prohibiting non-farm use for at least 10 years following the sale.

If the seller meets these conditions and makes the election on a timely return, the federal income tax attributable to the farmland gain is paid in four equal annual installments. The first installment is due on the original return due date for the sales year (without regard to extensions). Each subsequent installment is due on the corresponding return due date for the following year.

The provision codifies acceleration rules that bring the remaining installments due if certain triggering events occur. Failure to timely pay an installment, death of an individual taxpayer, or liquidation, sale of substantially all assets, or business cessation by a C corporation taxpayer all accelerate the accrual of the unpaid balance.

Who qualifies as a qualified farmer buyer

The buyer-side requirement is the gateway condition. The new election is unavailable if the buyer does not meet the definition of a "qualified farmer". The statute defines a qualified farmer as an individual who is actively engaged in farming within the meaning of subsections (b) and (c) of Section 1001 of the Food Security Act of 1986 (7 U.S.C. 1308-1).

Active engagement in farming under that referenced statute generally requires significant personal labor, management, or both, on the farm. A passive investor who buys farmland and leases it to operators does not qualify as a qualified farmer. A working farmer who personally operates the land or substantially manages its operations qualifies.

The qualified farmer must be an individual under the statute. Entities (corporations, partnerships, trusts) cannot themselves be qualified farmers under Section 70437. A practical complication: many active farming operations are structured through entities for liability and estate-planning purposes. The seller's tax advisor will need to evaluate whether the buyer's individual status (rather than entity status) supports the election. Sales to family farming operations may need to be structured with the individual operator as the named buyer to preserve the election.

The provision does not require that the buyer continue farming the specific parcel sold. The qualification attaches to the buyer's overall farming activity, not to the use of the purchased land. The 10-year use restriction (described below) is what locks in the post-sale farming use of the land itself.

For sellers structured through S Corporations or Partnerships that hold the farmland, the entity-level mechanics require careful review because the installment election affects how the gain flows through to owners and how each owner reports their proportional installment payments.

What counts as qualified farmland property

The seller-side requirement focuses on the property's farming history and its post-sale future. Both prongs matter.

Pre-sale farming history. The land must have been used by the taxpayer as a farm for farming purposes, or leased by the taxpayer to a qualified farmer for farming purposes, during substantially all of the 10 years ending on the date of sale. "Substantially all" is not statutorily defined but is generally interpreted in tax law to mean approximately 80% to 85% of the period. Brief gaps for crop rotation, weather-driven fallow years, or short-term non-farm use may not disqualify the property, but extended non-farm use within the 10-year window will.

Post-sale farming restriction. The property must be subject to a covenant or other legally enforceable restriction that prohibits the use of the property other than as a farm for farming purposes for any period before the date that is 10 years after the sale. This is a meaningful encumbrance. The seller must arrange for, and the buyer must accept, a 10-year use restriction recorded with the deed or established through a similar legally enforceable mechanism.

The terms "farm" and "farming purposes" carry the meanings given in Section 2032A(e), the special use valuation provision used in estate tax for family farms. This generally includes traditional crop farming, livestock operations, dairy, poultry, fish farming, fruit and nut orchards, vineyards, and certain forestry operations. It excludes purely residential use, recreational use, and most commercial development.

Partnership and S corporation property used for farming flows through the entity to its owners under the rules. Each direct or indirect interest holder in a farming partnership or S corporation can be treated as having used or leased the property for farming purposes for purposes of the 10-year history test.

The covenant requirement creates a real-world transaction friction. Recorded farmland-use restrictions often reduce a property's marketability for non-farm uses, which can affect the sale price the buyer is willing to pay. Sellers will need to evaluate whether the tax savings from the installment election justify any price concession from the buyer accepting the use restriction.

How much does the four-installment election save sellers

The economic value of paying tax in four equal annual installments rather than at the original due date depends on the seller's cost of capital and the size of the gain. Three illustrative scenarios show the magnitude.

Scenario one. A retiring farmer sells 320 acres for $1.6 million with a $400,000 basis. Capital gain is $1.2 million; federal tax at a 23.8% combined capital gains and net investment income rate is $285,600. Under the four-installment election, the farmer pays $71,400 on the original return due date and $71,400 each of the next three years. At a 7% cost of capital, the present value benefit of the deferred installments is approximately $26,000 to $28,000.

Scenario two. A farming family sells a 640-acre operation to a younger, qualified farmer, generating a $4 million capital gain and $952,000 in federal tax. Annual installments of $238,000 over four years deliver approximately $87,000 in present-value cash-flow benefit and preserve working capital for transition needs such as housing, healthcare, generational gifting, and debt retirement.

For sellers managing tax across other strategies, Tax loss harvesting in the same year as the farmland sale can offset the gain at the federal level, reducing the absolute tax liability before the installment election applies. Pairing the election with Depreciation and amortization recapture analysis for equipment sold with the land also matters, since recapture income is treated at the ordinary rate and may not be eligible for the same installment treatment.

How does Section 70437 differ from installment sales

Section 70437 does not replace the traditional installment sale rules under Section 453. Sellers can choose between the two frameworks, or potentially combine elements depending on transaction structure.

A traditional Section 453 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.

Section 70437 lets the seller 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 (Section 453 can be spread over much longer periods if the buyer's note is long-dated).

For sellers with flexible transaction options, the right answer depends on the buyer's preferred payment terms, the seller's risk tolerance, and the cost-of-capital comparison between the two structures. A seller who needs cash at closing and has a qualified farmer buyer is well-positioned to use Section 70437. A seller whose buyer prefers to finance over 10 or 15 years may find Section 453 a better fit.

What triggers the acceleration of the remaining installments

Section 70437 includes acceleration rules that require all unpaid installments to be due immediately upon certain events. Three triggers apply.

Failure to pay any installment promptly accelerates the remaining unpaid installments to the date of the missed payment. A seller running into cash flow trouble in year two may face the full remaining liability becoming due immediately.

An individual taxpayer's death accelerates unpaid installments to the due date for the return for the year of death. Estate planners with farmland-selling clients need to coordinate the installment election with broader estate planning to avoid surprises.

C corporation, trust, or estate liquidation, asset sale, or business cessation accelerates unpaid installments. The provision includes a safe harbor allowing a buyer of substantially all assets to assume the remaining installment obligations under an agreement with the IRS.

For business owners considering Late C Corporation elections or Late S Corporation elections for entities that hold farmland, the entity structure choice interacts with how the installment election operates and how acceleration applies.

How does this fit into broader farm succession planning

The Section 70437 installment election is one tool in a broader farm succession toolkit. It works alongside, not in place of, other established planning techniques.

Special use valuation under Section 2032A continues to apply to qualifying farm estates, allowing estate tax valuation at lower farm-use values rather than at the highest and best use values. Sellers may evaluate whether to sell during life under Section 70437 or hold the farmland until death to take advantage of the stepped-up basis with a potential Section 2032A election.

Conservation easement deductions generate a current income tax deduction equal to the easement-driven value reduction. The two strategies can be sequenced: a landowner who places a conservation easement first (capturing the deduction) and later sells under Section 70437 (capturing the installment election) can stack the benefits.

For aging farmers planning succession, coordinating with Hiring kids to employ children in farm operations, the Augusta rule for short-term home rentals on farmstead property, and the Sell your home Section 121 exclusion for the farmhouse residence create a multi-track exit strategy in which different property components capture different tax benefits.

What documentation supports a Section 70437 election

A taxpayer making the four-installment election must include with the return for the sale year a copy of the covenant or other legally enforceable restriction that satisfies the 10-year farmland use requirement. This documentation accompanies the return that elects the installment treatment.

Sellers should also retain documentation of the 10-year pre-sale farming history, including farm income reporting on prior tax returns (Schedule F or partnership/S corporation farm activity), USDA program participation records, and lease agreements with prior tenant farmers if the property was leased rather than owned and operated. Buyer-side documentation of qualified farmer status includes the buyer's farm income reporting and operating documentation establishing active engagement in farming.

For trustees and personal representatives navigating Section 70437 in the administration of estates that include farmland, coordination with Individuals tax filing for the decedent or beneficiaries ensures the installment election flows through correctly.

How Instead helps farmers plan farmland sales for 2026

Section 70437 takes effect for sales completed in tax years beginning after December 31, 2025. The four-installment election is a meaningful planning tool for retiring farmers, agricultural landlords, and trustees managing farmland assets, but the qualifying conditions require careful pre-transaction structuring. The 10-year covenant restriction, the qualified farmer buyer requirement, and the proper election filing on the original return all require coordination among the seller, buyer, transaction counsel, and tax advisor.

Visit Instead's comprehensive tax platform to model farmland sale scenarios, evaluate whether the four-installment election or a traditional Section 453 installment sale produces better economics for your transaction, and coordinate the tax strategy with broader farm succession planning. Review pricing plans to find the support level that matches your transaction complexity.

Frequently asked questions

Q: What is the deadline for paying each of the four installments?

A: The first installment is due on the original return due date for the year of sale, determined without regard to any extension. Each subsequent installment is due on the corresponding return due date for the following year. For a calendar-year individual taxpayer who sells farmland in 2026, the first installment is due April 15, 2027, and the final installment is due April 15, 2030.

Q: Can I use this election if my buyer is a corporation that farms my land?

A: No. The qualified farmer must be an individual actively engaged in farming. Sales to corporate or partnership buyers do not qualify for Section 70437, even if the entity is engaged in active farming. Family farming operations may need to structure transactions with the individual farmer-operator as the named buyer to preserve the election.

Q: What happens if the buyer stops farming the purchased land within 10 years?

A: The 10-year covenant or restriction is the binding mechanism. If the buyer breaches the use restriction by converting the land to non-farm use within 10 years of the sale, the restriction's enforcement mechanism (typically a deed restriction with reversion or damage provisions) applies. The seller's installment election is generally not unwound by buyer-side breach of the covenant, but specific facts may vary.

Q: Can I combine Section 70437 with a traditional Section 453 installment sale?

A: The two frameworks serve different purposes. Section 453 spreads the tax over time to track buyer payments. Section 70437 spreads the tax over four years, regardless of the buyer's payment timing. A single transaction generally fits one framework or the other, not both. Sellers should evaluate which framework best aligns with their cash flow, risk, and transaction-structure goals.

Q: When does the new election become available for actual transactions?

A: Section 70437 applies to sales taking place in tax years beginning after December 31, 2025. The first qualifying sales for calendar-year taxpayers occur on or after January 1, 2026, with the first installment payment due April 15, 2027.

Q: Does Section 70437 affect state income tax on farmland sales?

A: No. Section 70437 is a federal income tax provision. State income tax treatment of farmland sales follows each state's separate rules. Some states conform to federal installment sale provisions; others have their own frameworks. Sellers should check state-level conformity and may need to plan separately for state tax timing on the farmland gain.