Drought livestock sales: Tax deferral rules
This is a summary of IRS publications, not tax advice. Tax treatment depends on your accounting method, your entity and the facts of your operation. Ask your tax preparer before you file. Report an error
The short version
If drought forced you to sell more livestock than you normally would, two federal tax rules may let you push back the tax on the extra sales. Section 451(g) can let you report the gain on the extra animals one year later. Section 1033(e) can let you postpone the gain on extra breeding, dairy or draft animals if you buy replacements, with up to four years to replace them when the area was designated for federal assistance, and longer when drought continues.
Each September the IRS publishes a notice listing counties with severe, extreme or exceptional drought in the 12 months ending August 31. The current one is Notice 2026-54. If your replacement period is scheduled to end at the end of 2026 and your county or a neighboring county is on that list, the period is extended. Your tax preparer decides whether and how these rules apply to you.
The two rules side by side
| Section 451(g): one-year deferral | Section 1033(e): replacement | |
|---|---|---|
| Which livestock | All livestock, including poultry, held for sale or for draft, breeding, sport or dairy | Livestock (not poultry) held for draft, breeding or dairy |
| Must you buy replacements? | No | Yes |
| Federal disaster designation required? | Yes | No (but it lengthens the replacement period) |
| Time to replace | Not applicable | 2 years after the end of the tax year of the sale, or 4 years if the area is eligible for federal assistance; can be extended by IRS notice |
| Which sales count | Only animals sold above the number you would normally sell under your usual business practice | |
Source: IRS Publication 225, Table 3-2 and chapter 11.
Section 451(g): Report the gain one year later
Pub 225 lists four conditions:
- Your principal trade or business is farming.
- You use the cash method of accounting.
- You can show that, under your usual business practice, you wouldn't have sold the extra animals this year except for the weather.
- The weather caused the area to be designated as eligible for federal assistance. The designation can come from the President, USDA or another federal agency, and sales made before the designation can still qualify if the same conditions caused it.
The livestock don't have to be raised or sold in the drought area, but the sale has to be caused by drought affecting the animals' water, grazing or other needs. You figure the deferral separately for each class of animal (cattle, sheep, hogs), not by age, sex or breed.
Pub 225's example, worked through: a calendar-year rancher normally weans 100 calves and sells them the following January or February. Because of drought, 35 head were sold at weaning in the fall, so 135 head were sold in the year for $121,500.
- Income per head: $121,500 ÷ 135 = $900
- Extra head sold because of drought: 35
- Income that can be postponed to the next year: $900 × 35 = $31,500
To make the election you attach a statement to the return for the year of the sale. It includes the number of animals sold in each of the 3 preceding years, the number you would normally have sold, the number sold because of the weather, evidence of the conditions and the designation date. Pub 225 lists everything the statement must include.
Section 1033(e): Replace the herd and postpone the gain
Selling breeding, dairy or draft animals (other than poultry) solely because of drought, flood or other weather can be treated as an involuntary conversion. Only the animals above your usual sales count. Pub 225's example: a dairy that usually sells 5 animals a year sold 20 because of drought, so 15 are treated as an involuntary conversion.
If you buy replacement animals within the replacement period, you may postpone the gain. If the replacements cost less than what you received, the difference is taxed. The postponed gain reduces the basis of the replacements.
When replacing cattle isn't practical: if drought makes it unfeasible to reinvest in similar livestock, Pub 225 says you can treat other farm property (not real estate) as replacement property. Its example: 25 extra cows sold for $31,250 with a $0 basis, and the money used for a $40,000 hay baler. The $31,250 gain can be postponed, and the baler's basis becomes $40,000 − $31,250 = $8,750.
How long you have to replace
- Generally: 2 years after the end of the first tax year in which you realize any of the gain.
- Area eligible for federal assistance: 4 years after the end of that tax year.
- Drought that continues: under Notice 2006-82, a 4-year period is extended until the end of your first tax year ending after the first drought-free year for your region.
For a calendar-year rancher who first realized the gain in 2022 in an area eligible for federal assistance, the 4-year period runs to December 31, 2026 (2022 plus four years). That is exactly the group Notice 2026-54 covers.
How the IRS drought notices work
Notice 2006-82 sets the rules; each year's notice applies them.
- Your applicable region is the county where the drought caused the sale, plus every county that borders it.
- A drought-free year is a 12-month period ending August 31 with no week of severe (D2), extreme (D3) or exceptional (D4) drought reported anywhere in your region on the U.S. Drought Monitor.
- Each September the IRS publishes the counties with D2 or worse drought in the 12 months ending August 31. You can use that list instead of checking the weekly Drought Monitor maps yourself.
Notice 2026-54 lists the counties (and parishes, boroughs and, for Connecticut, planning regions) with severe, extreme or exceptional drought during the 12 months ending August 31, 2026. For a taxpayer whose 4-year drought replacement period is scheduled to end at the end of 2026 (or, for a fiscal-year taxpayer, at the end of the tax year that includes August 31, 2026), the period is extended if the region includes any listed county. The extension runs until the end of the first tax year ending after a drought-free year.
To check your county, open the notice and find your state in the appendix, then check the counties that border yours too. Your county guide on this site shows current drought conditions, and the Drought & Disaster Dashboard shows recent weekly levels. The IRS list and the Drought Monitor map archive are the official references.
Common mistakes
Counting every animal sold. Both rules apply only to animals sold above your usual number. Keep sale records from the 3 years before so you can show what normal looks like.
Using 1033(e) for calves or feeders held for sale. Section 1033(e) covers breeding, dairy and draft animals. Animals held for sale fall under the one-year 451(g) deferral instead, if you qualify.
Forgetting the second statement. Under 1033(e), you attach a statement for the year of the gain and another for the year you buy the replacements. If you don't replace within the period, you file an amended return and pay the tax.
Checking only your own county. Under Notice 2006-82 the region includes the counties that border yours, so a listed neighboring county can extend your period.
What to do
If you sold extra livestock because of drought this year: Gather sale records for this year and the 3 years before, and any USDA or presidential disaster designation for your area. Ask your preparer: "Does section 451(g) or 1033(e) fit my sales?"
If you postponed gain under 1033(e) in an earlier year: Work out when your replacement period ends, then check Notice 2026-54 for your county and every bordering county.
If you're not sure whether your county had a federal designation: Your FSA county office can tell you about USDA Secretarial disaster designations for your county. Find yours at farmers.gov.
If drought also cost you grazing: The tax rules are separate from USDA payments. See whether the Livestock Forage Disaster Program may apply to your county.
A drought sale can bunch two years of calf income into one, or push a herd's gain into a single tax year. These rules exist to spread that out. A conversation with your preparer before you file is worth more than an amended return after.
Sources
- Section 451(g) conditions, example and statement; Section 1033(e) involuntary conversion, replacement periods, other farm property, the hay baler and dairy examples; Table 3-2: IRS Publication 225 (2025), Farmer's Tax Guide, chapters 3 and 11
- Extension rules, applicable region, drought-free year, the September county list and the 2026 list: IRS Notice 2026-54 (PDF)
- Underlying extension procedure: Notice 2006-82
- Weekly drought maps: U.S. Drought Monitor map archive
IRS pages checked October 21, 2026.
Built by ranchers who've been through it. Every guide on this site is free. If it was useful, share it with a neighbor.