Context: Section 1062 Election Explained
The One, Big, Beautiful Bill (OBBB) introduced a new election under Internal Revenue Code section 1062 for taxpayers who sell or exchange qualified farmland property to a qualified farmer. (irs.gov) Under this election, tax on the gain from the sale doesn’t have to be paid in full immediately — instead it can be spread over four equal annual installments. (irs.gov)
What Notice 2026-3 Does
Issued under Revenue Procedure in February 2026, Notice 2026-3 offers relief from additions to tax under • IRC § 6654 (individual underpayment of estimated tax) • IRC § 6655 (corporations, estates, trusts) for those making a valid section 1062 election. (irs.gov)
Key points include:
- 75% of the applicable net tax liability, for the qualified farmland sale, is excluded from estimated tax payments for the first year. Only 25% is required by the return due date. (irs.gov)
- Taxpayers who already reported penalties can file a Form 843 claiming abatement “pursuant to Notice 2026-3.” (irs.gov)
Who Is Affected
This relief applies to those who:
- Sold or exchanged qualified farmland property;
- Made a valid section 1062 election;
- Have estimated tax obligations in their year of sale/exchange. (irs.gov)
Example Situation
Jake, a sole proprietor, sold qualified farmland in tax year 2025. He made the section 1062 election, which allows him to spread the gain tax over four years. For 2025, he must still file Form 1040-ES but only pay 25% of the gain’s net tax liability by the return due date; the rest is deferred. If he initially paid none, he may have a penalty under § 6654 — but he can now request abatement under this Notice.
Compliance Recommendations
- Make the election correctly, including all required documentation and by the return filing deadline (without considering extensions).
- Estimate your net tax liability related to the farmland sale so you know the deferred vs immediate payment amounts.
- File Form 843 if you’ve already been assessed a penalty for underpayment due to the deferred amounts.
- Ensure forms like Form 1040-ES or related return instructions reflect the change.
Why It Matters
This policy change eases cash flow pressures caused by large gains from farmland sales, especially for taxpayers who were previously required to pay penalties due to the structure of the estimated tax rules. It’s an important example of how Congress and the IRS are balancing tax enforcement with taxpayer fairness.