On this week’s Tuesday Tax Take, we are diving into a new provision enacted by the One Big Beautiful Bill Act (OBBBA) that directly impacts farmers and farmland owners. This provision allows certain landowners to defer capital gains taxes when selling qualified farmland, with the goal of making farm transitions easier and keeping land in agricultural production.
How Deferral Works
Traditionally, when farmland is sold, any gain from appreciation is taxed in the year of the sale. Under the new law, sellers of qualified farmland can elect to spread that capital gain over four annual installments rather than paying the full tax in the year of sale. This change does not reduce the total amount of tax owed, but it helps sellers avoid a large, one-year tax burden and may prevent them from being pushed into a higher tax bracket.
Eligibility Requirements
- Qualified Property: The land must have been used as a farm (or leased to a farmer) for at least 10 years before the sale.
- Eligible Buyer: The purchaser must be an active farmer who agrees to continue farming.
- Use Covenant: The property must remain in agricultural use for 10 years after the sale. If this condition is not met, the deferral may be revoked.
- Covered Assets: The deferral applies only to farmland and permanent agricultural improvements. It does not extend to equipment, livestock, or other personal property.
Key Features
- No new rate: Capital gains are still taxed at normal federal rates; the benefit is in timing, not a lower rate.
- Fixed period: The gain can be spread over four years.
Practical Implications
- Farm succession: Aging landowners now have more options for transferring farmland to younger farmers during their lifetimes without triggering an immediate, large tax bill.
- Farmland preservation: Because the deferral is tied to continued agricultural use, the law discourages sales that would convert farmland to non-farm development.
- Estate planning: The provision complements existing tools such as stepped-up basis and the increased estate tax exemption, giving farm families multiple ways to structure succession and retirement planning.
Why It Matters
The new deferral provision is intended to:
- Encourage older farmers to sell land earlier in life.
- Support beginning and expanding farmers in accessing land.
- Keep farmland in agricultural production for at least 10 years following a sale.
This article is provided for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with their attorney.
