9/24/2021
Farmers and ranchers forced to sell livestock due to drought may have an additional year to replace the livestock and defer tax on any gains from the forced sales.
Notice 2021-55 explains the circumstances when the four-year replacement period under section 1033(e)(2) is extended for livestock sold because of drought. The Appendix to the notice contains a list of counties that experienced exceptional, extreme, or severe drought conditions during the 12-month period ending August 31, 2021 to use this in determining if an extension is available.
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. Farmers or ranchers must have sold livestock because of drought conditions in an applicable region to qualify for relief. This is a county or other jurisdiction designated as eligible for federal assistance plus counties contiguous to it. Notice 2021-55 lists applicable regions in 36 states and one U.S. territory.
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.
This extension is given to eligible farmers and ranchers who sold livestock because of drought conditions in an applicable region 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 September 1, 2020, and August 31, 2021. This determination is made by the National Drought Mitigation Center.
Eligible farmers and ranchers whose drought-sale replacement period was scheduled to expire on December 31, 2021 will now have until the end of their next tax year to replace the sold livestock in most cases. Since the normal drought-sale replacement period is four years, this extension impacts drought sales that occurred during 2017. The replacement periods for some drought sales before 2017 are also affected because of prior drought-related extensions affecting some of these localities.
Resources for reporting drought sales and other farm-related tax issues can be found in Publication 225, Farmer's Tax Guide.
Notice 2021-55 will be in IRB: 2021-41 dated October 12, 2021.