Capital gains tax on land sales has long posed a challenge in farm succession planning, as the tax is usually due in full the year of sale. The resulting lump-sum payment can be substantial, affecting the timing and feasibility of transitions to younger or beginning farmers.
The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, changed that requirement for certain farmland sales. It didn’t lower anyone’s tax bill, but it did add the ability to pay the resulting capital gains tax in installments over four years instead of all at once. If you’re a landowner thinking about selling to a beginning or younger farmer, this provision is worth understanding.
What Does This New Provision Do?
The rule is more limited than it may initially appear. It does not change how capital gains are calculated or reduce the total tax liability. Capital gains rates themselves are unaffected by OBBBA and remain capped at 20%, and sellers should know that the 3.8% net investment income tax may still apply on top of that.
The primary change concerns the timing of payment. Rather than requiring the entire capital gains tax to be paid in the year of the sale, sellers can elect to spread the liability over four annual installments. This applies to sales or exchanges occurring in tax years beginning after July 4, 2025, the date OBBBA was signed into law, so it’s available for qualifying sales now. This option is not available for every land sale, however.
Who Qualifies to Spread Capital Gains Over Four Years?
This option is not available for every land sale. In general, a transaction must meet three main conditions to qualify:
- The buyer must be actively engaged in farming. The provision is intended to keep land in agricultural production rather than enable sales to passive investors.
- The land must carry a 10-year farming-only restriction. The sale must include a legally enforceable restriction prohibiting non-farming use of the land for at least 10 years after closing.
- The seller’s own use of the land must also meet certain requirements. For substantially the 10 years before the sale, the land generally needs to have been used by the seller, or by a tenant farming it on the seller’s behalf for farming purposes. The definitions of “farm” and “farming purposes” are based on Special Use Valuation rules under Internal Revenue Code Section 2032A.
Because these requirements involve land use history, buyer qualifications, and enforceable deed restrictions, consulting with a tax advisor before listing the land can help clarify eligibility.
How Does the Four-Year Payment Election Work?
If a sale qualifies, the election to spread the tax is made on the tax return for the year the sale occurred. The first installment is paid with that initial return. The remaining three installments are due annually over the next three years.
If a seller misses an installment payment, the entire remaining balance becomes due immediately, so careful planning is necessary. Additionally, if the seller passes away before all installments are paid, any outstanding tax becomes due with the final tax return for the year of death.
Why Would a Farmland Seller Want to Spread the Tax Bill?
The primary appeal of this approach is improved cash flow management rather than tax savings. A substantial capital gains tax bill due in a single year may require a seller to make significant financial adjustments, such as using other savings, postponing reinvestment, or altering the terms of the sale to accommodate the tax deadline. Allowing the liability to be paid over four years can help align tax payments with the receipt and use of sale proceeds, especially in multi-year transition arrangements.
What Does This Mean for Beginning and Younger Farmers?
This provision may also be relevant to buyers. Because the tax benefit depends on selling to someone actively engaged in farming and on locking the land into agricultural use for a decade, sellers may be more willing to consider offers from younger or beginning farmers rather than non-farming investors. If you are negotiating a purchase agreement with a retiring landowner, discuss this provision and involve their tax advisor early in the process.
What Should You Do Before Relying on This Provision?
Eligibility depends on factors such as prior land use, whether the buyer qualifies as an active farmer, and whether the farming restriction is drafted in a way that’s legally enforceable. Before structuring a sale around this election, consult a tax professional who specializes in agribusiness.
Getting the details right can be crucial for a smooth land transition. MBE CPAs works with farm families on land sales, succession planning, and tax strategy. Contact us to discuss whether the four-year election could apply to your sale or purchase.