Eligible farmers and ranchers who have been forced to sell livestock due to drought may have more time to replace the livestock and defer federal tax on any gains from the forced sales.
IRS Notice 2023-67 lists the applicable areas, a county or other jurisdiction, designated as eligible for federal assistance on IRS.gov. This includes 49 states, the District of Columbia, 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 ineligible.
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 can 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 and an example of how this provision works are in Notice 2006-82 on IRS.gov.
The IRS provides this extension to eligible farmers and ranchers who qualified for a four-year replacement period if the applicable region is listed as suffering exceptional, extreme or severe drought during any week between Sept. 1, 2022, and Aug. 31, 2023. (This determination is made by the National Drought Mitigation Center.)
Eligible farmers and ranchers whose drought-sale replacement period was scheduled to expire on Dec. 31, 2023, now have until the end of their next tax year to replace the sold livestock in most cases. 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 impacting some of these localities.
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