Farm Tax Relief Act of 1986

Farm Tax Relief Act of 1986 - Amends the Internal Revenue Code to exclude from income any gain from the sale of farm property by insolvent farmers where substantially all of the proceeds from the sale or exchange are applied to the indebtedness of the taxpayer.

Provides that gross income does not include any income resulting from a discharge of indebtedness of a farmer who: (1) has a debt to asset ratio in excess of 70 percent; and (2) earned 50 percent or more of his gross income in the preceding taxable year in the trade or business of farming.

Prohibits any investment tax credit recapture on sales of farm property by insolvent farmers.