Understanding IRS Form 1062: Deferral of Tax on Farmland Sales Guide

1. Introduction – What is Form 1062?

IRS Form 1062, officially titled “Deferral of Tax on Gain From the Sale or Exchange of Qualified Farmland Property to Qualified Farmers,” is a specialized federal tax election form administered by the Internal Revenue Service (IRS), an agency of the U.S. Department of the Treasury.

Authorized under Internal Revenue Code (IRC) Section 1062, Form 1062 is used by landowners, farmers, corporations, and estates to elect to defer federal income tax on capital gains realized from selling agricultural farmland to active, qualified farmers. The form allows taxpayers to pay the resulting net income tax liability in four equal annual installments.

2. Purpose of the Form – Why Does Form 1062 Exist?

Transferring agricultural land to the next generation of active farmers and ranchers presents significant economic challenges. Landowners selling farmland often face large, immediate federal capital gains tax bills in the year of sale, driving up land prices or forcing sales to commercial real estate developers.

Congress enacted IRC Section 1062 to promote agricultural conservation and assist young, beginning, and active farmers in acquiring working farmland. Form 1062 solves the tax liquidity problem for sellers.

By electing Section 1062 deferral, landowners who sell qualified farmland to qualified farmers spread their federal income tax liability evenly across a 4-year installment plan. In exchange, a land covenant is recorded ensuring the property remains dedicated to active agricultural production.

3. Who Needs to File This Form

Form 1062 is completed by taxpayers who realize a taxable gain on the disposition of agricultural real estate. You must file Form 1062 if your transaction meets all of the following criteria:

• Qualified Farmland Property Dispositions: You sold or exchanged real property located in the United States that was used by you (or your tenant) for farming purposes during the required statutory period.
• Sale to a Qualified Farmer: The buyer is a “qualified farmer”—an individual or business entity actively engaged in the trade or business of farming who intends to cultivate the land.
• Section 1062 Covenant Executed: A formal, legally binding Section 1062 land covenant has been executed and recorded in local county land records, legally restricting the property to agricultural use.
• Form 1062 Deferral Election: You elect under Section 1062 to pay the federal net income tax attributable to the farmland gain in four equal annual installments.

4. Who Is Exempt / Not Required to File

You do not need or are not permitted to file Form 1062 if your real estate transaction falls into any of these exempt categories:

• Sales to Non-Farmers: Farmland sold to commercial developers, non-farming corporations, or buyers who will not actively farm the land (such sales are fully taxable in the year of sale on Form 4797 and Schedule D).
• Lump-Sum Tax Payers: Landowners who choose to recognize and pay their full capital gains tax liability in the year of sale without electing Section 1062 installment deferral.
• Standard Section 453 Installment Sales: Transactions structured as seller-financed installment notes governed by IRC Section 453 (which have separate tax accounting rules on Form 6252).
• Non-Agricultural Real Estate: Sales of residential homes, commercial office buildings, or non-farm land.

5. When to File

Form 1062 and its required attachment, Schedule A (Form 1062), must be filed along with your annual federal income tax return (Form 1040, Form 1120, Form 1065, or Form 1041) for the tax year in which the qualified sale or exchange takes place.

Payment Due Dates for the 4 Annual Installments:

• First Installment (Year 1): Must be paid on or before the unextended tax return due date (e.g., April 15) for the tax year in which the sale occurred.
• Second, Third, & Fourth Installments (Years 2, 3, & 4): Must be paid on or before the unextended tax return due date for each of the three subsequent tax years.

6. Where and How to File

Form 1062 cannot be submitted as a standalone document. It must be attached directly to your primary annual federal income tax return.

Taxpayers can e-file Form 1062 and Schedule A (Form 1062) along with their annual tax return using IRS-approved tax software. If paper filing, attach Form 1062, Schedule A (Form 1062), and a copy of the recorded land covenant behind your main tax return, and mail the package to the specific IRS service center address as per instructions for your main return type.

7. Step-by-Step Instructions to Fill the Form

Making a Section 1062 election requires completing main Form 1062 alongside property-specific Schedule A (Form 1062). The table below outlines the primary sections on the form.

Form Section	Section Name	Instruction / Description
Header Section	Taxpayer Identification	Enter legal taxpayer name, Social Security Number (SSN) or EIN, and report total number of attached Schedules A.
Part I	Net Income Tax Determination	Calculate regular income tax liability including Section 1062 gains versus income tax liability excluding Section 1062 gains.
Part II	Applicable Net Tax Liability	Isolate the net tax attributable strictly to the farmland gain and divide by 4 to establish your first annual installment payment.
Schedule A (Form 1062)	Property & Buyer Details	Detail farmland acreage, acquisition date, sale date, gross proceeds, cost basis, buyer qualifications, and land covenant recording numbers.

Detailed Filling Steps

1. Complete Schedule A (Form 1062) First: Complete a separate Schedule A for each parcel of farmland sold. Detail physical property descriptions, cost basis, gross sales price, recognized capital gain, and buyer “qualified farmer” certifications. Record the county land recording reference number for the Section 1062 land covenant.
2. Calculate Base Tax Including Section 1062 Gain (Part I): Compute your total federal income tax liability including the Section 1062 farmland gain.
3. Calculate Base Tax Excluding Section 1062 Gain (Part I): Compute what your tax liability would be if the Section 1062 farmland gain were omitted from your return.
4. Isolate Section 1062 Net Tax Liability (Part II): Subtract the tax calculated without the farmland gain from the tax calculated with the farmland gain. The difference represents the net federal tax attributable to the farmland sale.
5. Compute First Installment Payment (Part II): Divide the net Section 1062 tax liability by **4**. Enter this amount as the first annual installment due on your tax return. Pay the first installment by the unextended return due date.

8. Required Documents/Information Needed Before Filling

To ensure a valid Section 1062 tax deferral election, gather the following legal and financial records before filling out Form 1062:

• Real Estate Closing Statements (Form 1099-S): Official settlement statements confirming gross sale proceeds and closing dates.
• Recorded Section 1062 Land Covenant: Copy of the legal land covenant stamped by the county recorder of deeds, legally binding the land to agricultural use.
• Qualified Farmer Documentation: Written representation and proof confirming the buyer actively operates an agricultural farming business.
• Property Cost Basis Ledgers: Original purchase contracts, capital improvement records, and accumulated depreciation ledgers for the farmland.
• Completed Schedule A (Form 1062): Property-by-property gain calculation schedules.

9. Common Mistakes to Avoid

Errors on Form 1062 can void your tax deferral and trigger immediate IRS tax demands. Watch out for these frequent mistakes:

• Failing to Record the Land Covenant: Filing Form 1062 without officially recording the required Section 1062 agricultural land covenant in local county land records.
• Missing the First Installment Payment Deadline: Failing to pay the first 25% installment payment on or before the original, unextended return due date.
• Selling to Ineligible Buyers: Claiming Section 1062 deferral on land sold to real estate developers, investors, or individuals who do not farm the land.
• Forgetting Schedule A (Form 1062): Submitting main Form 1062 without attaching a completed Schedule A (Form 1062) for each farmland transaction.
• Failing to Monitor Acceleration Triggers: Overlooking statutory rules that cause all remaining unpaid 4-year installments to become due immediately upon specific acceleration events.

10. Penalties for Non-Filing or Errors

If a taxpayer fails to comply with Section 1062 statutory rules, immediate statutory tax penalties apply under IRC Section 1062(b)(2):

• Automatic Acceleration of Unpaid Installments: Failing to pay any annual installment in full by its due date causes the **entire unpaid portion of all remaining installments to become due immediately**.
• Disallowance of Election: Selling to an unqualified buyer or failing to record the required land covenant invalidates the Section 1062 election, making 100% of the capital gains tax due immediately for the year of sale.
• Late Payment Penalties & Interest: Accelerated tax balances accrue failure-to-pay penalties (0.5% per month up to 25%) and compound daily interest from the original due date.
• Acceleration Upon Death or Corporate Dissolution: If an individual taxpayer dies, or if a C corporation/trust liquidates or ceases business, all remaining unpaid installments become due immediately on the final return.

11. Related Forms or Schedules

Taxpayers executing Form 1062 frequently interact with these related federal tax forms:

• Schedule A (Form 1062): Section 1062 Gain From the Sale or Exchange of Qualified Farmland Property to a Qualified Farmer.
• Form 4797: Sales of Business Property.
• Schedule D (Form 1040 / Form 1120): Capital Gains and Losses.
• Form 6252: Installment Sale Income.
• Form 1040 / Form 1120 / Form 1065 / Form 1041: Annual Federal Income Tax Returns.

12. Frequently Asked Questions

1. What is the primary purpose of IRS Form 1062?

Form 1062 allows sellers of qualified agricultural farmland to elect to pay the federal income tax on their capital gains in four equal annual installments when selling land to a qualified farmer.

2. Who qualifies as a “qualified farmer” under Section 1062?

A qualified farmer is an individual or business entity actively engaged in the trade or business of agricultural production (raising crops, livestock, dairy, or timber) who intends to use the land for farming.

3. What is a Section 1062 land covenant?

It is a legally binding covenant recorded in local land deeds requiring that the sold farmland remain dedicated to agricultural farming use for a specified statutory period.

4. How is the 4-year installment tax calculated?

Form 1062 isolates the net tax created by the farmland sale and divides that tax by 4. You pay 25% in the year of sale and 25% on your tax return due date for each of the next three years.

5. What happens if I miss an installment payment?

Under IRC Section 1062(b)(2), missing an installment payment defaults the agreement, causing the entire remaining unpaid tax balance to become due immediately.

6. Can Form 1062 be e-filed?

Yes. Form 1062 and Schedule A (Form 1062) can be e-filed electronically attached to your primary annual income tax return using approved tax software.

13. Conclusion – Key Takeaways

IRS Form 1062 is a vital tax incentive for agricultural landowners seeking to sell working farmland to active farmers while managing federal capital gains liabilities. By electing Section 1062 deferral, land sellers spread their federal tax bill across four equal annual installments, preserving capital while keeping American farmland in active production. To ensure IRS approval, verify buyer qualifications early, record the mandatory Section 1062 agricultural land covenant in county records, complete Schedule A (Form 1062) accurately, pay the first 25% installment on time, and e-file Form 1062 alongside your annual tax return.