Farmers and ranchers forced to sell livestock because of drought conditions may have more time to replace their livestock and defer tax on any gains from the forced sales. The IRS recently announced a one-year extension which gives eligible farmers and ranchers until the end of their first tax year after the first drought-free year to replace the sold livestock.
How the extension works
This extension applies to eligible farmers and ranchers who qualified for the four-year replacement period, if the they were suffering exceptional, extreme or severe drought conditions as determined by the National Drought Mitigation Center during any week between Sept. 1, 2021, and Aug. 31, 2022.
Because the normal drought-sale replacement period is four years, this extension impacts drought sales that occurred during 2018. As a result, eligible farmers and ranchers with a drought-sale replacement period ending Dec. 31, 2022, now have until the end of their next tax year to replace the sold livestock. The replacement periods for some drought sales before 2018 are also affected due to previous drought-related extensions affecting some of these localities.
For details on how the provision works, taxpayers should read IRS Notice 2006-82.
Eligible livestock sales
The sales must be solely due to drought in an area eligible for federal assistance. Farmers and ranchers must replace the livestock within a four-year period, instead of the usual two-year period. The IRS may extend this replacement period if the drought continues.
The relief generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, or poultry aren’t eligible.
Regions designated as eligible for federal assistance
Taxpayers can refer to IRS Notice 2022-43 for the list of areas eligible for federal assistance. The list includes 44 states, two U.S. Territories and two independent nations in a Compact of Free Association with the United States.
More information:
Publication 225, Farmer’s Tax Guide
Notice 2006-82, Extension of Replacement Period for Livestock Sold on Account of Drought