The Internal Revenue Service has issued guidance providing tax relief for farmers and ranchers in applicable regions forced to sell or exchange livestock because of drought conditions.
Under the guidance, farmers and ranchers may have an extended period of time to replace their livestock and defer tax on any gains from the forced sales or exchanges.
Notice 2024-70 PDF provides a list of the applicable areas, by county or other jurisdiction, designated as eligible for federal assistance. The list includes 41 states and other regions for which drought was reported during the 12-month period ending on Aug. 31, 2024.
The tax relief generally applies to capital gains realized by eligible farmers and ranchers on sales or exchanges 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 livestock sales or exchanges 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 replacement period extension announced in the notice gives eligible farmers and ranchers four years until the end of their first tax year after the first drought-free year to replace the sold or exchanged livestock. As a result, eligible farmers and ranchers whose drought-sale replacement period was scheduled to expire at the end of 2024 will have until the end of their next tax year to replace the sold or exchanged livestock.
The IRS provides this extension to eligible farmers and ranchers if the applicable region is listed as suffering exceptional, extreme or severe drought conditions during any week between Sept. 1, 2023, and Aug. 31, 2024. This determination is made by the National Drought Mitigation Center.
Details, including an example of how this provision works, can be found in Notice 2006-82, available on IRS.gov.
More information on reporting drought sales and other farm-related tax issues can be found in Publication 225, Farmer’s Tax Guide PDF, available on IRS.gov.
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