Farmers and ranchers forced to sell livestock due to drought may have an extended period in which to replace the livestock and defer tax on any gains from the forced sales, according to a recent IRS decision.
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, are not eligible. The areas covered include 49 states, the District of Columbia, and two U.S. territories.
The sales must be solely due to drought, causing an area to be designated as eligible for federal assistance. Livestock generally must be replaced within a four-year period, instead of the usual two-year period. The IRS is authorized to further extend this replacement period if the drought continues. The one-year extension, announced in the notice, gives eligible farmers and ranchers until the end of their first tax year after the first drought-free year to replace the sold livestock.
As a result, eligible farmers and ranchers whose drought-sale replacement period was scheduled to expire on Dec. 31, 2023, in most cases, now have until the end of their next tax year to replace the sold livestock. Because the normal drought-sale replacement period is four years, this extension impacts drought sales that occurred during 2019. The replacement periods for some drought sales before 2019 are also affected due to previous drought-related extensions affecting the same locations.