A recent reconciliation bill includes a provision that could offer meaningful relief to farmers facing large capital gains taxes. Kelly T. Wilfert, Extension Farm Management Specialist at the University of Wisconsin-Madison Division, outlines how this change benefits agricultural producers, particularly those planning to sell farmland.
New Capital Gains Flexibility Under Code Section 1062
One of the key components of the bill is the addition of Code Section 1062 to the Internal Revenue Code. This provision allows farmers to spread capital gains taxes on farmland sales over four years rather than paying the full tax amount upfront.
“What that provision does is it actually allows you to spread out any capital gains on farmland over four installments, over four years,” said Wilfert.
This offers strategic flexibility for farm owners who are looking to transfer or sell land prior to death, rather than holding assets indefinitely for estate tax advantages. It provides a path for producers to transition their land or exit farming more gradually, easing the financial pressure of a single, large tax payment.
Understanding Capital Gains in Agriculture
Capital gains taxes are incurred when a farmer sells an asset—such as farmland—for more than its original purchase price. The tax is based on the difference between the sale price and the owner’s tax basis in the property.
“For some of our farms who’ve held farmland for a number of years, that could be fairly significant,” Wilfert explained. “That appreciation that’s being taxed could be, again, a big deal for those farms.”
Many producers, particularly multigenerational farms, have held land for decades. The value appreciation over time can result in substantial tax liability if sold. Spreading this liability over four years helps farmers manage the financial impact more effectively.
Implications for Farm Transitions
The change is particularly useful for farmers looking at succession planning or transitioning out of farming altogether. Instead of relying solely on estate transfers at death, producers now have greater flexibility to plan sales while still alive, facilitating smoother generational transitions and improved cash flow planning.
Conclusion
The inclusion of Code Section 1062 in the reconciliation bill marks a significant shift in how capital gains taxes are handled for farmland sales. By allowing installment payments over four years, this change supports farm succession strategies and offers real financial relief for producers navigating land sales.
Reporting by Lorrie Boyer for AgNet West.