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Selling land or farmland: no recapture, big basis problem, and the oldest deferral tool there is

Land does not depreciate, so there is no recapture. The problem is basis: ground bought or inherited decades ago sells at almost pure gain. Installment sales were built for this.

One-page cheat sheet for this exact situation, plus a live Zoom walkthrough Saturday, October 10, 2026 at 10:30 AM PT / 1:30 PM ET. Nothing is sold.

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What this sale costs if nothing is planned

160 acres bought in 1990 for $200,000, sold to a developer for $2,400,000, married couple, Iowa, 2026

Layer	Rate (source below)	Amount
Long-term capital gain ($2.2M)	15% / 20%	about $420,000
Net investment income tax	3.8%	about $84,000
Iowa (flat 3.8%)		about $84,000
Total		about $588,000 (27% of gain)

Rounded, illustrative, assumes no other income in the year of sale. See Sources and review at the bottom of the page.

The options, in plain language

Five ways this tax gets paid, spread or shrunk

Section 453 installment sale. Take the price over 5 to 15 years; keep each year under the 20% and NIIT lines. Structured version removes buyer-default risk. Traditional for farm sales.
1031 exchange. Land for land, land for a rental building, land for a Delaware statutory trust. Defers all of it. Farm equipment does not qualify.
Hold until death. Heirs get a full step-up in basis; the gain disappears. If the sale can wait or a life estate works, this beats every strategy.
Conservation easement. Give up development rights: a large charitable deduction and a lower sale price later. Only with a legitimate land trust and a real appraisal.
Charitable remainder trust. Deed the land to a CRT before the contract; untaxed sale, income for life, deduction now.

Who this is written for: people who have owned the asset for years, often decades, and are selling once, usually around retirement. If you are buying and selling frequently, different rules (dealer status, ordinary income) apply and this page is not for you.

Six questions to bring to your CPA

What is my basis, and was any of it stepped up when a parent died?
Is any of the gain ordinary (dealer status, subdivided lots, crops in the ground)?
Installment schedule that keeps each year under 20% and NIIT?
Does a 1031 into an income property make sense versus a note?
Special-use valuation (2032A) if the land stays in the family?
State: does mine tax capital gains, and at what rate?

The deadlines that decide it

Installment terms in the contract.
1031: 45 / 180 days from closing.
Easement: appraisal and deed before year end for the deduction.
Estimated tax in the quarter of the sale.

Common questions

Straight answers

Is there depreciation recapture on land?

No. Only on buildings, tile, fences and equipment.

Does an installment sale protect me if the buyer stops paying?

A seller note leaves you with the land back and a mess; a structured installment sale is paid by a life insurer at closing and removes that risk.

What if a developer wants an option first?

Option payments are not taxed until the option is exercised or expires; then they are part of the price.

Should I subdivide to get a higher price?

Subdividing and selling lots can turn capital gain into ordinary dealer income. Get advice before the first plat.

Audit trail

Sources and review

Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, retirement educator; IRS Special Enrollment Examination Parts 1, 2 and 3 passed, enrollment pending; California licensed insurance professional #4273294. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.

Capital gains rates and brackets 2026: IRS Rev. Proc. 2025-32 (2026 inflation adjustments); IRC 1(h)
Net investment income tax 3.8%: IRC 1411; thresholds $200,000 single / $250,000 MFJ, not indexed
Depreciation recapture 25% (unrecaptured 1250) and 1245: IRC 1(h)(6), IRC 1245, IRC 1250; IRS Pub. 544
Section 121 home-sale exclusion: IRC 121; IRS Pub. 523; surviving-spouse 2-year rule IRC 121(b)(4)
1031 exchange rules: IRC 1031 (real property only after TCJA 2017); Treas. Reg. 1.1031(k)-1 (45/180 days, QI); IRS Form 8824
Delaware Statutory Trust as 1031 property: IRS Rev. Rul. 2004-86
Installment sales: IRC 453; IRS Pub. 537; Form 6252; IRC 453A interest charge above $5,000,000; IRC 453(k) excludes publicly traded stock
Monetized installment sales: IRS Dirty Dozen (IR-2023-54 and later); proposed regs REG-109348-22
QSBS: IRC 1202 as amended by P.L. 119-21 (2025): $15M cap, tiered holding periods for stock issued after July 4, 2025
Charitable remainder trusts: IRC 664; Treas. Reg. 1.664; pre-arranged sale doctrine (Rev. Rul. 78-197)
Step-up in basis: IRC 1014; community property IRC 1014(b)(6)
Inherited IRA 10-year rule: IRC 401(a)(9)(H) (SECURE Act); Treas. Reg. 1.401(a)(9) final regs 2024
California treatment: Cal. Rev. & Tax. Code 17041 (rates), 18031 (1031 conformity), FTB Form 3840 (out-of-state exchange tracking); Prop 19 (Cal. Const. art. XIII A, sec. 2.1)
Purchase price allocation: IRC 1060; IRS Form 8594

Figures are 2026 federal amounts and 2025 California rates unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed September 21, 2026.

Selling land or farmland: no recapture, big basis problem, and the oldest deferral tool there is

What this sale costs if nothing is planned

Five ways this tax gets paid, spread or shrunk

Six questions to bring to your CPA

The deadlines that decide it

Straight answers

Is there depreciation recapture on land?

Does an installment sale protect me if the buyer stops paying?

What if a developer wants an option first?

Should I subdivide to get a higher price?

Sources and review

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