Agricultural Loans for Agriculture Act of 1986

Agricultural Loans for Agriculture Act of 1986 - Amends the Internal Revenue Code to provide that Agricultural Loans for Agriculture (ALFA) Bonds are qualified tax-exempt bonds. Requires: (1) such obligations to be general obligations of a State; (2) the proceeds to be used to make or finance loans for acquiring farmland for use in a trade or business of farming, or refinancing loans secured by farmland only if the borrower is engaged in the trade or business of farming; and (3) such obligations be issued as part of a program under which the gain from the sale of farmland by farmers is exempt from income tax.

Permits the nonrecognition of gain from the sale of farmland if the taxpayer within one year beginning on the date of such sale purchased an ALFA bond. Requires the recognition of gain from such sale to the extent that the amount realized from such sale exceeds the cost to the taxpayer of the ALFA bond. Provides for the recapture of the tax benefit of the nonrecognition provision if the ALFA bond is disposed of before the end of the three-year period beginning on the date of purchase of the bond. Provides that the recapture provision shall not apply if the disposition of the ALFA bond is the result of death.

Requires that the taxpayer's basis in the ALFA bond purchased as a result of the nonrecognition provisions must be reduced by an amount equal to the amount of gain not so recognized on the sale of the property.

Extends the statute of limitations with respect to the assessment of tax on the sale of farmland involving the purchase of any ALFA bond. Provides that the holding period for an ALFA bond shall include the period for which the property sold or exchanged had been held as of the date of such sale or exchange.