Some good news for farmers and ranchers who were forced to sell livestock due to drought — they may have an additional year to replace the said livestock and defer tax on any gains from the forced sales, according to the Internal Revenue Service.
However, the farmer or rancher must be in an applicable region, according to an IRS news release. This is a county-designated as eligible for federal assistance plus counties contiguous to that county. 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 IRS stated in the release.
For affected ranchers and or farmers to qualify, the sales must be solely due to drought, flooding or other severe weather causing the region to be designated as eligible for federal assistance. Livestock generally must be replaced within four years, instead of the typical two-year period. The IRS said it is also authorized to further extend this replacement period to ranchers and/or farmers if the drought continues.
The one-year extension gives those eligible farmers and ranchers until the end of the tax year after the first drought-free year to replace the sold livestock. Details, including an example of how this provision works, may be found in Notice 2006-82 (PDF), available on IRS.gov.
The IRS said it provides this extension to farmers and ranchers located in the applicable region who qualified for the four-year replacement period if any county that is included in the applicable region is listed as suffering exceptional, extreme or severe drought conditions during any week between the time period of Sept. 1, 2018, and Aug. 31, 2019.
The IRS news release explains this determination is made by clear by the National Drought Mitigation Center. All or part of 32 states, plus Guam, the U.S. Virgin Islands and the Commonwealths of Puerto Rico and the Northern Mariana Islands, are listed in Notice 2019-54 (PDF).
As a result, qualified farmers and ranchers whose drought-sale replacement period was scheduled to expire at the end of this tax year, Dec. 31, 2019, in most cases, now have until the end of their next tax year to follow suit. Because the normal drought-sale replacement period is four years, this extension immediately impacts drought sales that occurred during 2015. The replacement periods for some drought sales before 2015 are also affected due to previous drought-related extensions affecting some of these localities, according to the IRS.
For farmers and ranchers needing more information on reporting drought sales and other farm-related tax issues the information may be found in Publication 225, Farmer’s Tax Guide, available by visiting the website at IRS.gov.