A little-talked about, but valuable, provision of the OBBBA (Section 1062 of the Internal Revenue Code (the “Code”)) allows taxpayers recognizing gain on the sale or exchange of “qualified farmland property” to a “qualified farmer” to pay the tax on such gain over four (4) equal installments over four (4) years.
What is “qualified farmland property”? Section 1062(d)(2)(A) defines “qualified farmland property” as real property located in the United States that “has 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-year period ending on the date of the qualified sale or exchange and which is subject to a legally enforceable restriction which prohibits the use of such property other than as a farm for farming purposes for any period before the date that is 10 years after the date of the sale or exchange…”
In other words, there are three requirements to be “qualified farmland property”:
- Real property located in the United States,
- Used for farming purposes for 10 years prior to the sale, and
- The property is subject to a legally-enforceable covenant prohibiting it from being used for non-farm purposes for 10 years.
What is a “qualified farmer”? Any individual who is actively engaged in farming is a “qualified farmer.”
The first payment is due on the due date (without regard to any extensions) for filing the tax return of the taxable year in which the sale or exchange occurs. The next three installments are due on each of the due dates for the tax return for the following three years.
The installment payments may be accelerated in the following circumstances:
- If any installment is not paid timely, the unpaid installments become immediately due on the date the installment is late.
- If an individual who elected to pay in installments dies, the unpaid installments are due on the due date for the tax return for the taxable year in which the taxpayer died.
- If the taxpayer making the election to pay in installments is a C corporation, trust, or estate, and there is a liquidation or sale of substantially all of the assets of the taxpayer, the cessation of business, or similar circumstance, the unpaid installments are due on the date of such event, unless, in the event of a sale of substantially all of the assets, the buyer assumes the obligation to make the remaining installment payments.
This is a powerful, advantageous option for farmers, but specific steps must be followed and complied with.
If you are selling farmland, contact us to discuss whether this is a good option for you to defer paying the tax on the sale of your farmland.
