Livestock held for draft, breeding or dairy purposes that are sold as a result of drought or weather-related conditions may qualify for favorable tax treatment. Gain does not have to be recognized on these sales if the proceeds from the sale are used to purchase replacement livestock within two years from the end of the taxable year in which the sale takes place.
A longer replacement period is available if the sale occurs in an area eligible for federal disaster assistance. This allows the livestock owner to maintain his herd without being disadvantaged from a tax standpoint by the sale of the livestock.
In order to qualify, repurchased livestock must serve the same purpose as those sold – for example, dairy cows must be purchased if dairy cows were sold. It must also be shown that the weather-related conditions caused the sale of livestock in a greater quantity than would normally be sold.
This determination is made by comparing the number of livestock sold in the year with the weather-related conditions to the number of livestock sold in a typical year. The difference between the two would be allowable for deferral of gain assuming the other requirements are met.
A second provision applies to the weather-related sale of any livestock. If qualifying under this exception, income from the sale of livestock can be postponed to a subsequent tax year. In order to qualify the following conditions must be met:
• The taxpayer’s principal business must be farming.
• The farmer must use the cash method of accounting.
• The farmer must show that the livestock would normally have been sold in the following year.
• A drought, flood or other weather-related condition that caused an area to be declared a Federal disaster area must have caused the sale of the livestock.
This provision is somewhat limited based on the requirement of a federally declared disaster area. However, weather-related events are an uncontrollable, unpredictable part of every farmer’s operations. It’s helpful to be aware that the tax code does provide some relief when dealing with these unforeseen circumstances.
In conclusion, livestock sales lead to a myriad of different tax treatments and opportunities. Proper record-keeping and communication with tax advisers is essential in receiving the most favorable tax treatment.
It’s also important to be aware of the applicable holding periods that must be met in order to receive the preferential capital gain rates on the sale of draft, breeding and dairy livestock. When disaster strikes, there are planning tools available to help minimize the tax consequences and replace livestock without the additional burden of an increased tax liability.
