The OBBBA Adds a New Option for Structuring Farmland Sales – What is it Worth?

The One Big Beautiful Bill Act (“OBBBA”) includes a new Code section that allows owners of farmland who sell that land to farmers to elect to pay resulting federal income tax over four years without interest.  See, Section 1062 (Gain from the Sale or Exchange of Qualified Farmland Property to Qualified Farmers).

However, this provision is narrow.  The election is limited to tax resulting from “gain from the sale or exchange of qualified farmland property to a qualified farmer.”  The deferral given is short term.  A number of requirements must be met.  

First, in order for farmland property to be “qualified” it must be “real property” located in the United States.

• There is no requirement that the gain from the sale of qualified farmland property be capital. So, for instance, gain from the sale of real property that is recharacterized as ordinary under Section 1252 of some other section appears to be covered. 
  
  
• However, the gain must be from the sale of “real property.” If farmland is sold along with other kinds of assets, what other gains are covered?  For instance, would gain attributable to farm buildings qualify?  What about growing crops? The section does not provide any guidance as to the scope of “real property” for this purpose.[1] 

 [1] Compare Section 2032A, which provides special rules for estate tax valuation of “qualified real property.”  While the definitions in Section 2031A(e)(4) and (5) are incorporated in new Section 1062, the definition in Section 2032A(e)(3) is not.  Compare also Section 1231(b)(4) which characterizes the gain from the sale of unharvested crops as capital if “the crop and land are sold or exchanged … at the same time and to the same person…”     

• However, the gain must be from the sale of “real property.” If farmland is sold along with other kinds of assets, what other gains are covered?  For instance, would gain attributable to farm buildings qualify?  What about growing crops? The section does not provide any guidance as to the scope of “real property” for this purpose.[1]

Second, in order for farmland property to be “qualified” it also must “during substantially all of the 10-year period ending on the date of the qualified sale or exchange” have been either (i) used by the taxpayer [i.e., the seller] as a farm for farming purposes, or (ii) leased by a taxpayer to a qualified farmer for farming purposes.”  The section incorporates the definition of “farm” and “farming purposes” contained in Sections 2032A(e)(4) and (5).

• This language limits the election to sellers who used or leased the farmland for farming purposes for the requisite period of time. There is no requirement that a lease be a crop share lease.  Cash leases appear covered provided they are “to a qualified farmer for farming purposes.” (But note, as described below, a “qualified farmer” must be an individual.)  

Third, there is nothing limiting sellers eligible to make the election to individuals.  For instance, partnerships, S corporations and C corporations are eligible.

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