IRS Announces Extension of Replacement Period for Sold Livestock

IRS continues relief to drought-stricken farmers and ranchers in 44 states, other regions

September 28, 2022

WASHINGTON — The Internal Revenue Service is reminding farmers and ranchers in applicable regions forced to sell livestock because of drought conditions that they may have more time to replace their livestock and defer tax on any gains from the forced sales.

Today, the IRS posted Notice 2022-43 listing the applicable regions, a county or other jurisdiction, designated as eligible for federal assistance on IRS.gov. This includes 44 states, two U.S. Territories and two independent nations in a Compact of Free Association with the United States. 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 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. Details, including an example of how this provision works, can be found in Notice 2006-82, available on IRS.gov.

The IRS provides this extension to eligible farmers and ranchers that qualified for the four-year replacement period, if the applicable region is listed as suffering exceptional, extreme or severe drought conditions during any week between Sept. 1, 2021, and Aug. 31, 2022. This determination is made by the National Drought Mitigation Center.

As a result, eligible farmers and ranchers whose drought-sale replacement period was scheduled to expire on Dec. 31, 2022, 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 2018. The replacement periods for some drought sales before 2018 are also affected due to previous drought-related extensions affecting some of these localities.

More information on reporting drought sales and other farm-related tax issues can be found in Publication 225, Farmer's Tax Guide, available on IRS.gov.