Capital gains tax on farmland: what each piece of the farm costs you in 2026

A farm sale is several sales at once

The buyer writes one check, but the IRS taxes a farm asset by asset, and the purchase agreement should allocate the price the same way on both sides. The usual pieces:

• Land and land you rented out: Section 1231 property once held more than one year (IRC 1231(b)(1)). Net 1231 gain for the year is taxed at the long-term rates, 20% above $613,700 of taxable income for joint filers (Rev. Proc. 2025-32, 2026).
• Machinery, grain bins, single-purpose livestock and hog buildings: Section 1245 property (IRC 1245(a)(3)). Gain up to the depreciation you took is ordinary income, which after years of Section 179 and bonus depreciation is often most of the sale price.
• The house and general-purpose barns: Section 1250 buildings. Depreciation on a barn is unrecaptured 1250 gain taxed at up to 25% (IRC 1(h)(6), 2026); the farmhouse you live in may qualify for the Section 121 exclusion.
• Growing crops sold with the land: an unharvested crop sold at the same time and to the same buyer as land held over a year is treated as 1231 property (IRC 1231(b)(4)), but the costs of raising that crop are not deductible (IRC 268).
• Grain and feed on hand: inventory, ordinary income.

The allocation between land and bins matters most: every dollar shifted from land to equipment turns a 1231 dollar into an ordinary one. Our purchase price allocation page shows how buyers and sellers pull in opposite directions.

Raised livestock: zero basis, but 1231 gain

A cash-method farmer deducts the feed, vet bills and labor that go into raising a heifer, so a raised cow has no tax basis. That sounds bad, but it is a favorable result: because the animal was never depreciated, there is no 1245 recapture, and the full price of a qualifying breeding or dairy animal is 1231 gain.

The holding period is the trap. Cattle and horses count only if held for draft, breeding, dairy or sporting purposes for 24 months or more from acquisition; other livestock need 12 months; poultry never qualifies (IRC 1231(b)(3)). A dairy dispersal that sells first-calf heifers at 22 months old reports those animals as ordinary income. Purchased breeding stock that you depreciated is different again: gain up to the depreciation taken is 1245 recapture. A herd sale schedule should sort animals into these three groups before the auction.

Sections 1252 and 1255: recapture most sellers forget

If you deducted soil and water conservation costs under IRC 175, such as terraces, grassed waterways or ponds, Section 1252 claws them back as ordinary income when you sell the land within 10 years of acquiring it. The applicable percentage is 100% within 5 years, then 80%, 60%, 40% and 20% in years six through nine, and 0% at 10 years or more (IRC 1252(a)(3)). The recapture is the smaller of that percentage of the deductions or the gain.

Section 1255 does the same for government cost-share payments you excluded from income under IRC 126: 100% of the excluded amount is ordinary income if you sell within 10 years of receiving the payment, dropping 10 percentage points for each year after that (IRC 1255(a)(2)). Long-held family land usually escapes both, but a farm bought in the last decade and improved with conservation money can carry a surprise. Both show up on Form 4797, Part III (IRS Publication 225, 2025 edition).

Cash rent vs farming it: the 3.8% question

The 3.8% net investment income tax under IRC 1411 (2026 threshold $250,000 of modified AGI for joint filers, not indexed) reaches gain on property held in a passive activity. Cash renting is a rental activity and passive for most landlords, so in our first example the land sale adds $61,560 of investment income tax. When the sellers farm the ground themselves and materially participate, the land is property used in a non-passive trade, and the same sale owes no NIIT, leaving the total at $425,300.

Retired farmers get a special rule: IRC 469(h)(3) treats a retiree or surviving spouse who met the 2032A material participation test as still materially participating in a farming activity. Whether that reaches land you now crop-share depends on whether the lease is a farming activity or a rental, which turns on your risk and involvement. A straight cash lease is a rental. If you are within a few years of selling, the lease form is worth reviewing with your CPA; see investment income tax on a sale.

State farm breaks: Wisconsin and Iowa

Illinois, our example state, taxes farm gain at its flat 4.95% (35 ILCS 5/201, 2026) with no farmland break. Two big farm states treat farm sellers better:

• Wisconsin excludes 60% of capital gain on farm assets held more than one year, defined as livestock, farm equipment, farm real property and farm depreciable property, versus 30% for other assets (Wis. Stat. 71.05(6)(b)9, 2026). Depreciation recapture gets no exclusion.
• Iowa subtracts the entire net capital gain on real property used in a farming business if the seller materially participated in farming for 10 years and held the land 10 years, with a separate path for sales to relatives (Iowa Code 422.7(13)(b), 2026). Retired farmers can also subtract gain on breeding cattle and horses held 24 months. Iowa's material participation test excludes the federal retired-farmer rule, and cash-rent landlords who never farmed generally do not qualify. Iowa's flat rate is 3.8% for 2025 and later (Iowa Code 422.5).

Rules for other states are on each state capital gains page, for example Wisconsin and Iowa.

Spreading the farm sale

Selling everything in one year stacks recapture on top of land gain. In our third example the operator adds $104,345 of tax for $260,000 of machinery and bin recapture, because that income is ordinary and pushes the land gain higher. Farm sellers have two federal tools other sellers lack. Farm property is exempt from the Section 453A interest charge and pledge rule however large the note (IRC 453A(b)(3)(B)), so a land contract to a neighbor or child works at any size; see farm installment sale and the 453A interest charge. And for sales to a qualified farmer, IRC 1062 lets you pay the federal tax on qualifying farmland gain in four annual installments. Recapture is always taxed in the year of sale, even on an installment note (IRC 453(i)).

Some owners do the opposite and hold. Land kept until death gets a stepped-up basis, and special use valuation can lower its estate value; see the step-up hold analysis and Section 2032A. Get the Big Sale Tax Analysis at /analysis/ to compare a cash sale, a land contract and holding.

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