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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.

By , founder, Retirement Literacy Foundation · Updated
Admitted to practice before the IRS.

Short answerLand does not depreciate, so there is no recapture; the problem is basis. In this page's 2026 example, a married Iowa couple sells 160 acres bought in 1990 for $200,000 to a developer for $2,400,000 and owes about $544,500 in tax, 25% of the gain, if everything is paid in one year (last reviewed October 10, 2026).

Free Big Sale Tax Worksheet

One page that shows every tax layer on your sale: federal capital gains, depreciation recapture, the 3.8% net investment income tax, and state tax.

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The number

What does selling land or farmland cost in tax?

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

LayerRate (source below)Amount
Long-term capital gain ($2.2M)0% / 15% / 20%about $388,000
Net investment income tax3.8% of income over $250,000. Not owed on land you actively farmed (IRC 1411(c))about $74,100
Iowaflat 3.8% (Iowa Code 422.5)about $82,400
Totalabout $544,500 (25% of gain)

Rounded, illustrative, assumes no other income and no selling costs in the year of sale. Federal: 2026 brackets and $32,200 standard deduction (IRS Rev. Proc. 2025-32). Iowa also lets some retired farmers exclude farmland gain (Iowa Code 422.7); ask before you assume the state line. See Sources and review at the bottom of the page.

The options, in plain language

How can you pay less tax or spread it out?

  1. Section 453 installment sale. Take the price over 5 to 15 years; keep each year under the 20% and NIIT lines. A structured version swaps buyer-default risk for the credit risk of the third party that makes the payments. Traditional for farm sales.
  2. 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.
  3. 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.
  4. 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.
  5. 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

  1. What is my basis, and was any of it stepped up when a parent died?
  2. Is any of the gain ordinary (dealer status, subdivided lots, crops in the ground)?
  3. Installment schedule that keeps each year under 20% and NIIT?
  4. Does a 1031 into an income property make sense versus a note?
  5. Special-use valuation (2032A) if the land stays in the family?
  6. 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; in a structured installment sale the buyer pays cash at closing and a third party makes your payments, so you carry that third party's credit risk instead of the buyer's.

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, EA, retirement educator. Admitted to practice before the IRS. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.

Figures are 2026 federal and 2026 California amounts unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed October 10, 2026.

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