IRS Provides Estimated Tax Penalty Relief for Sales of Qualified Farmland Property

(Parker Tax Publishing January 2026)

The IRS provided penalty relief from the additions to tax under Code Secs. 6654 and 6655 for underpayments of estimated income tax attributable to a sale or exchange of qualified farmland property to a qualified farmer under Code Sec. 1062(a), as added by the One Big Beautiful Bill Act. A taxpayer may exclude 75 percent of the applicable net tax liability (with respect to the qualified sale or exchange as to which the taxpayer has properly made a Code Sec. 1062 election) from the calculation of the required annual payment for purposes of determining estimated income tax installment amounts for the tax year of the qualified sale or exchange for which the election is made. Notice 2026-3.

Background

The One Big Beautiful Bill Act (OBBB) (Pub. L. 119-21) redesignated pre-OBBBA Code Section 1062 as Code Sec. 1063 and inserted a new Code Sec. 1062. Code Sec. 1062(a) now allows a taxpayer who has gain from the sale or exchange of qualified farmland property to a qualified farmer (qualified sale or exchange) to elect (by making a Section 1062 election) to pay the applicable net tax liability determined under Code Sec. 1062(d)(1)(A) in four equal installments. Code Sec. 1062(b)(1) provides that, if a Section 1062 election is made, the first installment must be paid on the due date (determined without regard to any extensions) for the return of tax for the tax year in which the qualified sale or exchange occurs, and each succeeding installment must be paid on the due date (determined without regard to any extensions) for the return of tax for the tax year following the tax year with respect to which the preceding installment was made.

Code Sec. 1062(d)(1)(A) defines "applicable net tax liability" with respect to a qualified sale or exchange as the excess (if any) of (i) such taxpayer's net income tax for the tax year, over (ii) such taxpayer's net income tax for such tax year determined without regard to any gain recognized from the qualified sale or exchange. Code Sec. 1062(d)(1)(A) defines "net income tax" for these purposes to mean the regular tax liability (as defined in Code Sec. 26(b)) reduced by the credits allowed under subparts A (Code Secs. 21-26), B (Code Secs. 27-30D), and D (Code Secs. 38-45Z) of part IV of subchapter A of chapter 1 of the Code.

Code Sec. 1062(d)(2)(A) defines the term "qualified farmland property" as real property located in the United States that (i) during substantially all of the 10-year period ending on the date of the qualified sale or exchange has been used by the taxpayer either as a farm for farming purposes or leased by the taxpayer to a qualified farmer for farming purposes, and (ii) is subject to a covenant or other legally enforceable restriction which prohibits the use of such property other than as a farm for farming purposes for 10 years after the date of the qualified sale or exchange. Code Sec. 1062(d)(2)(A) further provides that property that is used or leased by a partnership or S corporation is treated as used or leased by each person who holds a direct or indirect interest in such entity. Code Sec. 1062(d)(2)(B) provides that the terms "farm" and "farming purposes" have the respective meanings given such terms under Code Sec. 2032A(e). Code Sec. 1062(d)(3) defines the term "qualified farmer" as any individual who is actively engaged in farming (within the meaning of 7 U.S.C. Sec. 1308-1(b) and (c)).

Code Sec. 1062(b)(2)(A) provides that if there is an addition to tax for failure to timely pay any installment required under Code Sec. 1062, then the unpaid portion of all remaining installments is due on the date of such failure. Additional circumstances, described in Code Sec. 1062(b)(2)(B) and (C), may also accelerate the due date of unpaid installments. Code Sec. 1062(e) requires that a taxpayer making a Section 1062 election include with the return for the tax year of the qualified sale or exchange a copy of the covenant or other legally enforceable restriction described in Code Sec. 1062(d)(2)(A)(ii). Forthcoming guidance will provide further instructions on how a taxpayer may properly make a Section 1062 election.

Under Code Sec. 6654, individual taxpayers are generally required to pay estimated income tax in four installments, each in the amount of 25 percent of the required annual payment. For an individual calendar-year taxpayer, estimated tax payments generally are due on April 15, June 15, and September 15 of the tax year, and on January 15 of the following year. For an individual fiscal-year taxpayer, the due dates of installments of estimated income tax are determined by substituting corresponding months. Code Sec. 6655(a) imposes an addition to tax for failure by a corporation to make a sufficient and timely payment of estimated income tax. For corporations using the calendar year for their tax year, estimated income tax installments generally are due on April 15, June 15, September 15, and December 15 of the tax year.

Notice 2026-6

Taxpayers making a Section 1062 election may be concerned that, in order to avoid the addition to tax under Code Secs. 6654 or 6655 for failure to make a sufficient and timely payment of estimated income tax, they must pay the full amount of applicable net tax liability, or a substantial portion of it, as estimated income tax for the tax year of the qualified sale or exchange. According to the IRS, doing so would be contrary to the purpose of the Section 1062 election, which is to allow payment of the liability in installments over four years. Without a limited waiver of the addition to tax, a taxpayer making a Section 1062 election might be deprived of the full benefit of the provision.

In the interest of sound tax administration, the IRS will waive a portion of the addition to tax under Code Secs. 6654 and 6655 attributable to the qualified sale or exchange for which the Section 1062 election is made for taxpayers who both qualify to make a Section 1062 election and properly make a Section 1062 election. The limited waiver applies with respect to the applicable net tax liability the payment of which is deferred by the Section 1062 election.

Accordingly, a taxpayer may exclude 75 percent of the applicable net tax liability (with respect to the qualified sale or exchange as to which the taxpayer has properly made the Section 1062 election) from the calculation of the required annual payment for purposes of determining estimated income tax installment amounts for the tax year of the qualified sale or exchange for which the Section 1062 election is made. In determining the required annual payment for the tax year of the qualified sale or exchange, the taxpayer must include the portion of the applicable net tax liability that is required to be paid on the due date of the income tax return for the tax year of the qualified sale or exchange (25 percent of the applicable net tax liability with respect to the qualified sale or exchange as to which the taxpayer has properly made the Section 1062 election).

A proper Section 1062 election is a prerequisite to receiving the relief provided in Notice 2026-6, but an acceleration of installment due dates under Code Sec. 1062(b)(2) will not affect this waiver. The waiver will apply automatically to any taxpayer who qualifies for the waiver and does not self-report an addition to tax under Code Secs. 6654 or 6655 on their income tax return for the tax year of the qualified sale or exchange. A taxpayer who otherwise satisfies the criteria for relief, but who has already filed an income tax return reporting an addition to tax under Code Secs. 6654 or 6655, may request an abatement of the addition to tax by filing Form 843, Claim for Refund and Request for Abatement and noting "Abatement requested pursuant to Notice 2026-3" at the top of the claim. A taxpayer that satisfies the criteria for relief but receives a penalty notice from the IRS should also request an abatement of the addition to tax by filing Form 843.

The instructions to forms relevant to estimated income tax requirements, including Form 1040-ES, Estimated Tax for Individuals, Form 1041-ES, Estimated Income Tax for Estates and Trusts, Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, Form 2210-F, Underpayment of Estimated Tax by Farmers and Fishermen, Form 2220, Underpayment of Estimated Tax by Corporations, will be modified, as necessary, to reflect the relief granted by Notice 2026-6. If necessary, the modified instructions will be posted on https://www.irs.gov.

For a discussion of sales of qualified farmland to qualified farmers, see Parker Tax ¶119,700.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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