New Federal Rule Lets Farmland Sellers Spread Tax Over Four Years

A new federal tax provision allows eligible landowners in Davidson County to pay income tax on certain farmland sales in four equal annual installments. The rule takes effect immediately, offering a cash flow alternative for farmers selling property.

Farm CPA Paul Neiffer explained the mechanics of the provision on the Market Day Report. To qualify, the land must have been used for farming or leased to a qualified farmer for substantially all of the previous 10 years. The buyer must be an individual actively engaged in farming, not a business entity.

The property must also be subject to a legally enforceable restriction requiring it to remain in agricultural use for 10 years after the sale. Neiffer noted that this requirement creates complications for buyers and sellers who typically transact through corporations or limited liability companies.

Farmers may need to purchase the property individually before transferring it to a business entity, depending on their specific circumstances. Neiffer said some banks are treating the 10-year agricultural use covenant like a lien. This treatment raises concerns about how the restriction could affect financing.

The covenant may also reduce a property's appraised value. That reduction could limit how much land a buyer can afford, making the tax provision less attractive for transactions requiring loans. Neiffer added that his reading of the proposed regulations suggests the deferral may apply only to the tax attributable to the gain recognized in the first year of an installment sale.

This limitation could reduce the benefit for sellers who already plan to receive payments over time through traditional installment sales. Neiffer sees the most potential value in family farm transfers, such as when parents sell land to a child who intends to continue farming. In those cases, buyers are often more willing to accept the 10-year use restriction.

Neiffer cautioned that the deferral will not apply to every qualifying looking sale. He estimated that only about 10 to 20 percent of transactions might ultimately qualify based on the current restrictions. He encouraged landowners to consult their tax advisers before structuring a transaction around the new provision.