February 10, 2026 — Important relief for agricultural landowners navigating tax deferral options under the new Section 1062 election

The IRS has released Notice 2026-3, providing crucial penalty relief for taxpayers who elect to pay taxes on qualified farmland sales in installments under the newly enacted Section 1062 (created by the One, Big, Beautiful Bill Act of 2025). This guidance resolves a significant practical concern that could have undermined the benefit of the installment election.

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The Challenge: Estimated Tax Penalties vs. Installment Elections

Under Section 1062, taxpayers who sell or exchange qualified farmland property to a qualified farmer may elect to pay the resulting tax liability in four equal annual installments rather than all at once in the year of sale.

But here’s the problem: Federal tax law generally requires taxpayers to pay taxes as income is earned—through withholding or quarterly estimated tax payments. Without special relief, a farmer electing the 4-year installment payment could still face penalties under Sections 6654 (individuals) or 6655 (corporations) for “underpaying” estimated taxes in the year of sale—defeating the purpose of the installment election.

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The Solution: Automatic Penalty Waiver

Notice 2026-3 provides a limited waiver that allows taxpayers to exclude 75% of the applicable net tax liability (the portion deferred to future years) when calculating their required estimated tax payments for the year of sale.

What this means in practice:

✅ When calculating your 2025 estimated tax payments after making a Section 1062 election:
→ Include only 25% of the tax attributable to the farmland sale gain (the portion due with your 2025 return)
→ Exclude 75% (the portion deferred to 2026–2028 installments)

✅ The waiver applies automatically—no separate election or Form 8275 filing required
✅ Applies to both individuals and entities (estates, trusts, corporations) making valid Section 1062 elections

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Who Qualifies?

To benefit from this relief, you must:

1. Own qualified farmland property—U.S. real property that:
   • Was used by you (or leased to a qualified farmer) for farming purposes for substantially all of the prior 10 years, AND
   • Is subject to a legally enforceable 10-year restriction prohibiting non-farming use after sale
2. Sell or exchange the property to a qualified farmer (an individual “actively engaged in farming” per 7 U.S.C. §§ 1308-1(b) and (c))
3. Properly make the Section 1062 election on your tax return for the year of sale, including a copy of the required covenant/restriction

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Important Caveats

⚠️ This is not a deferral of the underlying tax—only relief from estimated payment penalties
⚠️ Acceleration rules still apply: Missing an installment triggers immediate due date for all remaining payments (Section 1062(b)(2))
⚠️ Different from farmer/fisherman rules: The Section 1062 “qualified farmer” definition differs from the Section 6654(i) farmer/fisherman exception for estimated taxes

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Bottom Line

This IRS guidance ensures that the Section 1062 installment election delivers its intended benefit: genuine tax payment relief for agricultural landowners transitioning property to the next generation of farmers. By excluding the deferred portion from estimated tax calculations, the IRS has removed a technical trap that could have penalized taxpayers for using a congressionally authorized deferral option.

For official guidance, refer to IRS Notice 2026-3. Consult a tax advisor familiar with agricultural transactions before making a Section 1062 election.

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Note: This summary references provisions of the hypothetical “One, Big, Beautiful Bill Act” for illustrative purposes. Always verify current law with IRS.gov or a qualified tax professional before making tax elections.