Notice of Proposed Rulemaking, Election to Pay in Installments Tax on Gain from Certain Farmland Property, REG-117095-25, 91 Fed. Reg. 63812 (proposed Sept. 29, 2026)

The Department of the Treasury and the Internal Revenue Service have issued proposed regulations (REG-117095-25) implementing Internal Revenue Code (IRC) Section 1062. This statutory provision was enacted by Section 70437 of Public Law 119-21, 139 Stat. 72, 248–250 (July 4, 2025), commonly referred to as the One, Big, Beautiful Bill Act (OBBBA). The primary legislative purpose underlying Section 1062 is to facilitate the transition of agricultural real property to active, younger generations of farmers by easing the immediate capital gains tax burden associated with outright sales of farmland.

Under Section 1062(a), eligible taxpayers who recognize gain from the sale or exchange of “qualified farmland property” to a “qualified farmer” may elect to pay their “applicable net tax liability” in four equal annual installments rather than recognizing the full tax obligation in the year of disposition. The Treasury Department promulgated these proposed regulations pursuant to its general rulemaking authority under Section 7805(a), as well as specific statutory mandates under Section 1062(c)(2) (governing pass-through entity elections) and Section 1502 (governing consolidated corporate groups).

Structural Modifications and Regulatory Additions

To accommodate the enactment of Section 1062, the OBBBA redesignated former IRC Section 1062 as new IRC Section 1063. The proposed regulations establish new regulatory sections within Title 26 of the Code of Federal Regulations, adding Proposed Regulations §§ 1.1062-0 through 1.1062-3 under 26 CFR Part 1.

In conjunction with these substantive additions, the IRS has introduced specific procedural compliance instruments:

Form 1062, “Deferral of Tax on Gain from the Sale or Exchange of Qualified Farmland Property to Qualified Farmers,” utilized by taxpayers to make the statutory election and calculate annual installment payments.
Schedule A (Form 1062), “Section 1062 Gain From the Sale or Exchange of Qualified Farmland Property to a Qualified Farmer,” required to substantiate qualified farmland property attributes and track pass-through gain allocations.
Form 1062-T, “Transfer Agreement Under Section 1062(b)(2)(C),” executed jointly by transferors and transferees seeking to avoid tax acceleration upon a sale of substantially all corporate or trust assets.

Statutory Authority and Legal Analysis

The Treasury Department’s legal framework synthesizes statutory construction, administrative efficiency, and anti-abuse safeguards across several key areas.

Qualified Farmland Property Standards and Statutory Exceptions

Proposed Regulations § 1.1062-1(o)(1) defines qualified farmland property as real property located in the United States—applying the statutory real property definition under Treasury Regulations § 1.1031(a)-3(a) and IRC Section 7701(a)(9)—that meets three strict cumulative conditions:

The property was used as a farm for farming purposes by the taxpayer, or leased 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” (the prior 10-year period).
The property is subject to a valid “Section 1062 covenant” prohibiting non-agricultural use for at least 10 years following the date of sale.
A copy of the Section 1062 covenant is explicitly attached to the taxpayer’s Federal income tax return for the relevant taxable year.

The IRS provides crucial relief regarding the “substantially all” prior 10-year usage test. Under Proposed Regulations § 1.1062-1(o)(2), periods of non-use are disregarded if necessary land management functions (such as soil erosion protection) are maintained while the property is:

“taken out of production pursuant to a Federal, State, Tribal, or local government program”;
“taken out of production pursuant to recognized good farming practices (for example, laying fallow or conditioning the soil)”; or
“taken out of production due to unforeseen events caused by factors outside the taxpayer’s control.”

Furthermore, Proposed Regulations § 1.1062-1(o)(3) permits tacking of prior farming use across specific acquisition structures. Taxpayers acquiring land during the 10-year period may count prior farming use if the property was acquired in a transaction where holding periods carry over under IRC Section 1223(1) (such as Section 1031 like-kind exchanges), Section 1223(2) (corporate reorganizations under Section 368(a)), or by bequest from a decedent. Residential structures and related improvements meeting Section 2032A(e)(3) standards also qualify as property used for farming purposes under Proposed Regulations § 1.1062-1(o)(4).

The Treasury Department takes a strict position regarding procedural compliance: under Proposed Regulations § 1.1062-1(o)(1)(ii) and Example 5 (§ 1.1062-1(x)(5)), “failure to attach the section 1062 covenant to the return would result in the real property not being qualified farmland property, which would mean that the sale or exchange of that property would not qualify for the section 1062 election.”

Definition of Qualified Farmer and Anti-Abuse Rules

Under Section 1062(d)(3) and Proposed Regulations § 1.1062-1(p)(1), a “qualified farmer” is defined as an individual who is “actively engaged in farming within the meaning of 7 U.S.C. 1308-1(b) and (c).”

To prevent tax-avoidance schemes involving prearranged multi-step transactions, Proposed Regulations § 1.1062-1(p)(2) incorporates an explicit step-transaction anti-abuse rule: a buyer is disqualified from being a qualified farmer if, “pursuant to a plan or an arrangement between the seller, buyer, and a third party existing at the time of a sale or exchange,” the farmland property is subsequently transferred to a third party who is neither a related person under Section 267(b) or Section 707(b)(1) nor an individual qualified farmer.

Pass-Through Entity Framework and Tiered Entities

The statutory scheme under Section 1062(c)(2) requires that elections for sales conducted by partnerships or S corporations be made at the partner or shareholder level. Proposed Regulations § 1.1062-1(m) expands this mechanism by defining a “pass-through entity” to include partnerships, S corporations, non-grantor trusts, and decedent’s estates to the extent gain is includible in owner or beneficiary gross income (e.g., pursuant to Sections 661–663). C corporations, Regulated Investment Companies (RICs under Section 851), Real Estate Investment Trusts (REITs under Section 856), and Section 1398 bankruptcy estates are expressly excluded. Disregarded entities and grantor trusts (under Sections 671–679) are treated as transparent, with the single owner or grantor deemed the direct taxpayer.

Where a pass-through entity incurs an entity-level tax (such as an S corporation subject to built-in gains tax under IRC Section 1374 or a complex trust retaining gain under Section 641), Proposed Regulations § 1.1062-2(a)(2)(ii) dictates that the pass-through entity itself may make an entity-level Section 1062 election. The IRS emphasizes that an entity-level election “is made solely with respect to its own applicable net tax liability and is independent from, and has no effect on, a section 1062 election by an owner or a beneficiary... and vice versa.”

To ensure operational compliance, Proposed Regulations § 1.1062-2(b)(2) establishes strict reporting duties for pass-through entities. The entity must file Schedule A (Form 1062), furnish copies of Schedule A and the Section 1062 covenant to all direct and upper-tier owners, and separately report allocable qualified gains on Schedule K-1. Failure to comply with these tier-reporting requirements results in automatic disqualification: “if a pass-through entity fails to comply... its owners or beneficiaries will be deemed ineligible to make the section 1062 election.”

Coordination with Other Internal Revenue Code Provisions

Proposed Regulations § 1.1062-2(f) establishes that “only the gain from the qualified sale or exchange that is included in gross income and recognized in the relevant taxable year is used to determine the taxpayer’s gain.” The IRS illustrates the practical interaction with other Code sections as follows:

IRC Section 453 (Installment Method): As demonstrated in Proposed Regulations § 1.1062-2(g)(5) (Example 5), where a seller receives deferred payments under Section 453, Section 1062 applies exclusively to the gain recognized and included in gross income in the year of sale. No Section 1062 election is available for tax liabilities attributable to deferred gains recognized in future tax years.
IRC Section 121 (Principal Residence Exclusion): Under Proposed Regulations § 1.1062-2(g)(6) (Example 6), if a sale includes a farmhouse qualifying for Section 121 exclusion, the excluded gain portion is omitted prior to calculating the Section 1062 applicable net tax liability.
Basis Allocation: Under Proposed Regulations § 1.1062-2(e), if a disposition involves tract property only partially constituting qualified farmland property, taxpayers must equitably allocate basis and amount realized pursuant to Treasury Regulations § 1.61-6 and maintain contemporaneous records.

Acceleration Events and Transferee Assumption Exceptions

Under Section 1062(b)(2) and Proposed Regulations § 1.1062-3(b), any remaining unpaid installment balances are accelerated upon the occurrence of specified triggering events:

Assessment of an addition to tax for failure to timely pay an annual installment (accelerated to assessment date);
Death of an individual taxpayer (accelerated to the due date of the decedent’s final return without extensions);
Liquidation, dissolution, cessation of business, or disposition of substantially all assets of a C corporation, trust, or estate (accelerated to event date or day prior to title 11 petition filing);
Corporate structural events, including a C corporation joining a consolidated group or a consolidated group terminating.

Pursuant to Section 1062(b)(2)(C) and Proposed Regulations § 1.1062-3(c), acceleration upon a disposition of substantially all corporate or trust assets may be avoided if the transferor and buyer enter into a Form 1062-T Transfer Agreement. The buyer must be an “eligible section 1062 transferee”—defined as a single United States person (under Section 7701(a)(30)) that is not a partnership, S corporation, bankrupt debtor, or insolvent entity under Section 108(d)(3).

The Transfer Agreement must be filed within 30 days of the acceleration event (or within 30 days following publication of final regulations under a transition rule), signed under penalties of perjury, and contain explicit financial representations and waivers. The transferee assumes full primary payment responsibility, while the transferor remains jointly and severally liable.

Proposed Effective Date and Taxpayer Reliance

The proposed regulations are structured to apply to qualified sales or exchanges occurring in taxable years ending after the date final regulations are published in the Federal Register.

Crucially for immediate tax planning, Treasury and the IRS explicitly authorize interim taxpayer reliance pending final regulations. Taxpayers “may rely on these proposed regulations under section 1062 with respect to qualified sales or exchanges that occur in a taxable year beginning after July 4, 2025, and ending on or before the date these regulations are published as final regulations in the Federal Register, provided that the taxpayers comply with these proposed regulations in their entirety and in a consistent manner.”

Prepared with assistance from Gemini Notebook.