By: Rebecca Konopka
Carter County Extension Agent
Generally, the sale of farmland triggers taxes in the year of the sale. Disregarding any depreciable items that are part of the sale, the tax treatment is long-term capital gains. That is assuming the property has been held at least one year. The capital gain is calculated based on the sale price minus the adjusted basis of the property. The adjusted basis is the amount paid for the land (or the value when inherited) minus any depreciation taken on improvements. Federal capital gains rates are currently 0%, 15%, or 20% depending on taxable income level. State and local taxes will also be owed on the gain depending on location.
One strategy to defer the capital gain tax is use of a 1031 like-kind exchange. A 1031 like-kind exchange allows landowners selling their property to reinvest in replacement property that is similar in nature. There are specific rules associated with a like-kind exchange. First, there is a 45-day window to identify the replacement property after the sale of the old property. Second, the new property must be acquired within 180 days of the sale. Third, a qualified intermediary must hold all the funds of the transaction. In other words, the landowner selling the old property cannot take possession of the money. Lastly, if the exchange of property includes related parties, then both parties must hold their respective properties at least two years to avoid triggering tax consequences.
As part of the One Big Beautiful Bill Act (OBBBA) of 2025, there is an option to spread out the taxes owed as part of selling farmland. The new option is referred to as IRC Section 1062. It applies to any farmland sales after July 4, 2025. The election allows a landowner to pay the federal taxes owed in four equal annual installments instead of one year. The land must be in the United States. It must have been in farm use 10 years prior to the sale. In addition, the buyer must be actively engaged in farming. There will need to be a restrictive covenant that legally enforces the use of the land for farming purposes for 10 years. The covenant would need to be attached to the tax return in the year of sale when the election is made. The first installment is due at the original due date of the tax return for the year of sales. The remainder is due with the following three tax returns. If any payments are missed the remaining tax becomes due immediately.
Lastly, there is a Kentucky tax credit available called the Kentucky Selling Farmer Tax Credit. It allows for an income tax credit of up to 5% of the sale price of qualifying agricultural assets, subject to annual and lifetime tax credit caps. The sale must be to eligible buyers who will continue using the land for farming purposes. Sales involving immediate family members do not qualify for the credit. There are applications that must be filed from both the seller and the buyer to qualify for the credit. These can be found at the Kentucky Selling Farmer Tax Credit (KSFTC) Program website at https://newkentuckyhome.ky.gov/entrepreneurship/KSFTC.
If a landowner is considering selling their farm property, it is recommended they contact their tax advisor and/or attorney before the sale takes place.
This article was written by Suzy Martin, KFBM Area Extension Specialist, for the University of Kentucky Department of Agricultural Economics newsletter published on January 28, 2026. Educational programs of the Cooperative Extension Service serve all people regardless of economic or social status and will not discriminate on the basis of race, color, ethnic origin, national origin, creed, religion, political belief, sex, sexual orientation, gender identity, gender expressions, pregnancy, marital status, genetic information, age, veteran status, or physical or mental disability.
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