Tax Byte

The IRS Issues Relief for Farmland Sales Under New Section 1062

Western CPE Staff

The IRS has issued Notice 2026-3 December 22nd for taxpayers electing to use the new Section 1062 installment payment option for qualified farmland sales. Section 1062 was added by the One, Big, Beautiful Bill Act (OBBBA) on July 4th, 2025, to allow installment payments for qualified farmland sales. Notice 2026-3 provides relief from estimated tax penalties under IRC Sections 6654 and 6655. This guidance makes a potentially problematic provision workable for taxpayers who sell their qualified farmland.

Understanding Section 1062

Section 1062, added by the One, Big, Beautiful Bill Act in 2025, allows taxpayers to pay the resulting tax liability in four equal annual installments. However, the land sold must meet the requirements for qualified farmland and the land must be sold to a qualified farmer.

Qualified Farmland (Section 1062(d)(2)(A)):S. real property that has been used by the taxpayer as a farm (or leased to a qualified farmer) for substantially all of the 10-year period before sale. The property must also be subject to a legally enforceable 10-year restrictive covenant—a legal restriction that prohibits the use of the property for anything other than farming purposes for 10 years after the sale.
Qualified Farmer (Section 1062(d)(3)): Any individual who is actively engaged in farming under the Food Security Act (7 U.S.C. § 1308-1(b) and (c)).

If the conditions for qualified farmland and qualified farmer are met, under Section 1062(b)(1), the taxpayer’s first installment is due with the tax return for the year of sale, with subsequent installments due with the next three years’ returns.

ARTICLE CONTINUES BELOW

Problems Created by IRC Sections 6654 and 6655

Without IRS Notice 2026-3, taxpayers faced a significant dilemma that would have undermined Section 1062’s purpose.

Under normal estimated tax rules, individuals must pay estimated tax equal to roughly 90% of their current year tax liability (or 100%/110% of the prior year), while corporations must pay 100% of the current year liability. These payments are due quarterly throughout the year. However, Section 1062 allows taxpayers to defer 75% of the farmland-related tax until years two through four.

To avoid estimated tax penalties under Sections 6654 and 6655, taxpayers would need to pay most of their total tax liability (including the farmland gain) upfront through quarterly estimated payments—even though Section 1062 explicitly allows installment payments over four years. As the IRS noted in the Notice, taxpayers would need to pay “the full amount of applicable net tax liability, or a substantial portion of it, as estimated income tax” to avoid penalties. This would have eliminated the intended cash flow benefit that Congress created.

The IRS Waives Penalties Created by Sections 6654 and 6655

Notice 2026-3 waives estimated tax penalties created by Sections 6654 and 6655 on the deferred portion. Taxpayers can exclude 75% of the applicable net tax liability from their required estimated tax calculations for the year of sale. They must include only the 25% that is due with the first installment.

This waiver applies automatically to any taxpayer who qualifies for relief. In addition this “does not self-report an addition to tax under Section 6654 or 6655 on their income tax return for the year of the qualified sale”. No additional forms or special requests are required beyond making the Section 1062 election itself.

What Qualifies the Taxpayer for a Section 1062 Election?

Taxpayers should meet all of Section 1062’s requirements before taking the election. The property must satisfy the 10-year use test, have a proper restrictive covenant in place, and be sold to a qualified farmer. The election must be made by the due date of the tax return for the taxable year of the sale, with a copy of the covenant attached.

However, there are events that will trigger immediate payment of all remaining tax installments:

Failing to pay any installment on time
A taxpayer’s death (for individuals)
Certain corporate events like liquidations or business cessations.

As always, taxpayers making Section 1062 elections should ensure that their estimated tax payments are calculated correctly. Taxpayers should include the first 25% installment in their estimated tax calculations and exclude the remaining 75% that will be paid in future years.

Penalty Abatement Available

For taxpayers who already filed returns reporting estimated tax penalties for clients who made this election, relief is available. File Form 843 (Claim for Refund and Request for Abatement) and note “Abatement requested pursuant to Notice 2026-3” at the top of the form. The same process applies if your client receives a penalty notice from the IRS.

The Bottom Line

Notice 2026-3 removes the estimated tax penalty obstacle that would have undermined Section 1062’s installment payment benefit. Without this relief, the estimated tax rules would have forced taxpayers to pay most of their liability upfront, defeating the purpose of the installment election.

For clients selling qualified farmland to qualified farmers, this combination of Section 1062 and Notice 2026-3 now provides meaningful cash flow relief—75% of the tax can be deferred over three years without triggering estimated tax penalties. That’s a planning opportunity worth discussing with your agricultural clients. Just remember that proper documentation is critical for taking this election. The election is irrevocable once made, and acceleration events can quickly eliminate the deferral benefit.

For more guidance on this topic, be sure to refer to IRS Notice 2026-3.