PARKER, COLO. (RFD-TV) — A new federal tax provision allows eligible landowners to spread tax payments on certain farmland sales over four annual installments, but restrictions involving buyers, land-use covenants and installment sales could limit how many transactions qualify.
Farm CPA Paul Neiffer joined Market Day Report to explain how the new provision works, where complications are emerging, and what landowners should consider before selling farmland.
How the Farmland Tax Deferral Works
The new provision allows eligible sellers to elect to pay the federal income tax attributable to gains from qualifying farmland sales in four equal annual installments, beginning in the year of the sale.
Neiffer said the provision generally applies to farmland that has 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, and the property must be subject to a legally enforceable restriction requiring it to remain in agricultural use for 10 years after the sale.
Those requirements can complicate transactions for buyers and sellers who typically do business through corporations or limited liability companies.
Neiffer said farmers may need to purchase the property individually before transferring it to a business entity, depending on their circumstances and how the rules apply.
Ten-Year Covenant Creates Complications
The required 10-year covenant is another potential obstacle. Neiffer said some banks are treating the restriction like a lien, raising concerns about how it could affect financing.
He also said the covenant may reduce a property’s appraised value, potentially limiting how much land a buyer can afford.
Those issues could make the tax provision less attractive for some transactions, particularly when buyers need financing to complete a purchase.
Neiffer said the rules are still relatively new, and practical challenges may become clearer as more transactions are evaluated.
Installment Sales May Reduce the Benefit
Neiffer also raised concerns about how the provision interacts with traditional installment sales, in which sellers receive payments over several years.
An installment sale can spread taxable gains across multiple years, potentially keeping the seller in a lower tax bracket than recognizing the entire gain in one year.
However, Neiffer said his reading of the proposed regulations suggests the new farmland provision may apply only to the tax attributable to the gain recognized in the first year of an installment sale.
That limitation could reduce the additional benefit for sellers who already plan to receive payments over time.
Neiffer said the value of the new provision depends on the individual transaction and how its tax consequences compare with other available options.
Family Farm Transfers May Be a Better Fit
Despite the complications, Neiffer sees potential value in certain family farm transfers, particularly when parents sell land to a son or daughter who plans to continue farming.
In those cases, he said, the buyer may be more willing to agree to the 10-year agricultural-use restriction.
Neiffer cautioned against assuming the deferral will automatically apply to every qualifying-looking sale. He estimated that only about 10-20 percent of transactions might ultimately qualify, based on the restrictions and complications he is seeing.
He encouraged landowners to consult their tax advisers before committing to a sale or structuring a transaction around the new provision.
