Section 1062 farmland sales: proposed four-installment rules

On September 28, 2026, the IRS announced proposed regulations under new Internal Revenue Code section 1062, the provision from the 2025 tax law that lets a seller of qualified farmland pay the income tax on the gain in four equal annual installments instead of all at once. The proposed rule hit the Federal Register the next day, and comments are due November 30, 2026. The statute itself is already law for sales in taxable years beginning after July 4, 2025, and Form 1062 already exists. What's new is the detail: who counts as a farmer, what the deed restriction has to say, and which events make the whole balance come due early.

We think the section 1062 farmland installment election deserves a walkthrough rather than a summary, because the fact pattern it's built for is one Oklahoma sees constantly. A landowner sells to the neighbor who's been leasing the ground, or to a child who farms, or to a long-time tenant when the owner retires. That one closing is a tax event and a succession event, and it's also a contract-drafting event, all at the same time.

What if you sell the farm to the tenant who's been leasing it?

Start with the most common version. You own a quarter section you inherited, you haven't farmed it yourself in years, and the operator next door has leased it from you the whole time. He wants to buy. You'd like to sell, but you've been carrying a low basis and the gain is large.

Under the statute, a qualified sale means two things have to be true. The land must be qualified farmland, and the buyer must be a qualified farmer. Miss either one and the election isn't available, no matter how agricultural the deal looks.

Is the land qualified farmland?

The proposed regulations define qualified farmland as real property in the United States that, during substantially all of the ten years before the sale, was either used by you as a farm or leased by you to a qualified farmer for farming purposes. Your tenant scenario fits the second branch, as long as the tenant was an individual actively engaged in farming during those years.

That ten-year lookback has some give in it. The proposed rule says land taken out of production under a federal, state, tribal, or local government program still counts, as does land laid fallow under recognized good farming practices or idled by unforeseen events outside your control, provided the necessary land-management functions continued. A few enrolled years don't break the chain by themselves.

Then comes the forward-looking half. The property must also be subject to a legally enforceable restriction that prevents any non-farm use for ten years after the sale. The proposed regulations call this the section 1062 covenant, and the mechanics are specific enough that we'll give them their own section below.

Is the buyer a qualified farmer?

A qualified farmer is an individual actively engaged in farming, and the proposed regulations borrow the meaning of that phrase from the federal farm-program rules at 7 U.S.C. 1308-1. That's the active-engagement concept from the federal farm-program statute, so an operator who's been signing up for farm programs may already be familiar with it.

Notice the word individual. An LLC or corporation buying the ground doesn't qualify as the buyer, even if a farmer owns it. That matters in Oklahoma, where many operations hold land in an entity for liability and succession reasons. If the tenant wants to take title in his farm LLC, the election is off the table as written.

The proposed regulations also carry an anti-abuse rule. A buyer isn't a qualified farmer if, at the time of the sale, there's a plan for the property to be transferred later to someone who isn't a farmer and isn't related. Selling to a farmer who's already lined up a developer behind him won't work.

What if the numbers are the question?

Suppose the land and the buyer both qualify. The election lets you pay the tax attributable to the gain in four equal installments of 25 percent each. The first installment is due on the regular due date of your return for the year of sale, without regard to extensions. The next three are due on the regular return due dates for the following three years.

The amount being split is what the proposed rule calls the applicable net tax liability. In plain terms, it's the difference between your net income tax for the year computed with the farmland gain and your net income tax computed without it. The proposed regulations frame that as regular tax after certain credits, so the installment covers the tax the gain actually caused rather than your whole bill.

Here's the counter-consideration we'd want any seller to hear before they get excited. Section 1062 is a deferral, not a reduction. You owe the same tax; you just owe it over four filing seasons. Compare that with a like-kind exchange, which can defer the gain itself if you're buying replacement property, and the choice depends heavily on whether you want to reinvest or cash out. We covered the exchange side in our piece on 1031 exchanges.

There's also a pricing cost hiding in the covenant. A ten-year bar on non-farm use lowers what a developer or non-farm buyer would pay for the same acreage. If your buyer is a farmer anyway, that may cost you nothing. If the land sits on the edge of a growing town, the covenant is a real concession, and the seller is trading price for deferral. That trade deserves a number on it.

What if the seller is a partnership or an S corporation?

Many Oklahoma farm and ranch families hold land in a family limited partnership or an S corporation. The proposed regulations and the Form 1062 instructions agree on how that works: the entity doesn't make the election. Each partner or shareholder makes his or her own election on his or her share of the gain.

The entity's job is paperwork. It files Schedule A of Form 1062 with its own return, reports each owner's share of the gain, and hands each owner a copy of the covenant. The owners who want to defer then attach their own Form 1062 to their individual returns. The same pattern applies when gain passes through a trust or estate to a beneficiary.

This is where the deal-structure conversation and the tax conversation collapse into one. Whether the land sits in the entity or in the individual's name changes who makes the election, and it changes whose death accelerates the balance. If a family is contemplating a sale to the next generation, the entity question belongs in the same meeting as the sale question, which is the argument we make in our article on passing the family business to your children.

What does the covenant actually have to do?

Here's the piece that turns a tax election into a real-estate drafting exercise, and it's the piece most likely to be handled badly. The proposed regulations require a section 1062 covenant that prohibits use of the property for anything other than farming for any period before the date ten years after the sale.

Timing is strict. The covenant must be executed before or at the closing, and it must be recorded in the land records office of the jurisdiction where the property sits before or at the time the deed is filed. Recording it later, or forgetting until tax season, is a problem the proposed rule doesn't offer a cure for.

The covenant must also run with the land. It must be enforceable against the buyer and every future owner for the full ten years, so the restriction is meant to survive a resale. A copy of the covenant also goes into the seller's tax return along with Form 1062.

Now the practitioner's wrinkle: in a typical Oklahoma farmland closing, the deed and the tax return are handled by different people months apart. The title company or closing attorney records the deed. The CPA prepares the return the following spring. Unless someone told the closing side about section 1062 before closing, the covenant simply won't exist, and the election dies at the courthouse rather than at the IRS. The tax lawyer's job here is largely to make sure the two halves of the transaction know about each other.

What if you extend your return?

Form 1062's instructions contain a trap worth pulling out on its own. The election is made by attaching Form 1062, Schedule A, and the covenant to your income tax return, and the election can be made on a return filed by the extended due date. But the first installment payment is due by the unextended due date.

For a calendar-year individual, that means April 15 of the year after the sale, even if the return itself isn't filed until October. A seller who assumes the extension covers everything will pay the first installment late. Under the proposed regulations, an addition to tax for failing to pay an installment on time is itself an acceleration event, which means the entire remaining balance becomes due.

Estimating the first installment before the return is finished is therefore part of the job, not an afterthought. We'd want the CPA computing the gain and the applicable net tax liability early enough to fund that April payment.

What makes the balance come due early?

Section 1062 is built like a mortgage with a due-on-sale clause. Certain events end the deferral and make the remaining installments payable at once. The proposed regulations list them.

• An addition to tax is assessed for failing to timely pay any installment.
• An individual taxpayer dies. The balance is due on the return due date for the year of death, so the final return carries it.
• For a C corporation, trust, or estate: liquidation, a sale or other disposition of substantially all of its assets, cessation of business, or a bankruptcy or similar proceeding.
• For a C corporation, joining or leaving a consolidated group.

The death trigger is the one Oklahoma families should read twice. The seller in these transactions is often a retiring owner in his seventies or eighties. If the election spreads the tax over four years and the seller dies in year two, the estate owes the remaining installments with the final return. That's a liquidity question for the estate plan, and it should be on the table before the sale closes rather than discovered by a personal representative.

There's one exception. When the acceleration event is a sale of substantially all assets, the transferor and an eligible transferee can enter into an agreement on Form 1062-T, signed under penalties of perjury, in which the transferee takes over the remaining installments. The proposed rule says the agreement is due within 30 days after the acceleration event, with special timing for events that happened before the election or before the regulations. Miss the window and the balance is due.

What if the IRS later adjusts the gain?

Audits happen, and land-sale audits often turn on basis. The proposed regulations address what happens when a deficiency is assessed against the applicable net tax liability after the election is in place. The deficiency is prorated among the four installments. The portion allocable to installments already due is payable on demand; the portion allocable to future installments simply increases those installments.

That proration is taxpayer-favorable and, in our view, sensible. It has a limit. If the deficiency is due to negligence or intentional disregard of the rules, or to fraud with intent to evade tax, the proration doesn't apply and the full deficiency is due immediately. A sloppy basis calculation that reads as negligence can cost a seller the deferral on the adjustment, so the basis file for inherited farmland deserves the same care as the covenant.

Where does this stand, and what should Oklahoma sellers do with it?

Two different things are true at once, and it helps to keep them apart. The statute is enacted and applies to qualified sales in taxable years beginning after July 4, 2025. The regulations are proposed. They're proposed to apply to sales in taxable years ending after the date the final regulations are published, and they may change after the comment period closes on November 30, 2026.

For sales in between, the proposed rule includes a reliance provision. A taxpayer may rely on the proposed regulations for a qualified sale in a taxable year beginning after July 4, 2025 and ending on or before the date final regulations are published, as long as the taxpayer follows the proposed regulations in their entirety and consistently. In practice that means a 2026 sale can be structured to the proposed rule today, but the structure has to follow the whole rule, not just the convenient parts.

On the Oklahoma side, the material we're working from says nothing about whether Oklahoma income tax will follow the federal installment treatment. We aren't going to guess. Whether the state conforms is a question to raise with your preparer before you rely on the election for the state portion of the bill.

Oklahoma ranchers already have federal relief rules aimed at them for weather-driven livestock sales, which we discussed in our note on IRS drought relief for Oklahoma ranchers. Section 1062 is a different animal: it's about the land leaving the family, and it rewards sellers who plan the deed and the return as a single project.

If a farmland sale to a farmer is on your horizon, the covenant and the April installment need attention before the closing date, not after, and so does the question of who holds title. Our Oklahoma City office works with sellers and their CPAs and closing counsel on exactly this kind of coordination, and you can reach us through the firm's contact page. A conversation before the deed is recorded tends to be far cheaper than one after.

This article is general information about Oklahoma, Texas, and federal law, not legal advice, and it does not create an attorney-client relationship. Facts matter; talk to a lawyer about yours.