Drought Sale

A drought sale occurs when unanticipated and uncontrollable conditions force farmers to sell more animals than usual in a given year. Such sales receive special tax treatment in order to help farmers recover from difficult circumstances.

Drought sales get their name from the liquidation of extra livestock due to poor weather. For example, if dry weather causes a reduction in the available food supply for cattle, a farmer might be forced to sell livestock that they might otherwise be inclined to keep. Because of this, the U.S. tax code allows farmers to defer the tax on any profits from such sale for a year, allowing the money to do as much good as possible in a crisis situation. The tax code also allows farmers to avoid taxes on the sale of breeding, draft and dairy animals entirely if they purchase replacement animals within a specified period of time. The special tax treatment applies even if the profits from the livestock sales exceed the amount in losses from the drought.

Despite the name, the tax deferral does not apply exclusively to a situation involving a drought. Any losses from an unanticipated, catastrophic event such as a disease outbreak, widespread insect damage, floods or wildfires would qualify. However, the federal government makes the determination as to whether farmers in a given area qualify for favorable tax treatment for drought sales.

In the summer of 2017, many parts of the northern Midwest experienced hotter and drier weather than usual. The weather reduced hay crops and dried up available pasture, which in turn forced farmers to sell off more animals than usual much earlier in the season than they normally would have.

In order to qualify for favorable tax treatment, a farmer from the afflicted area would have to sell more livestock than normal due to the drought conditions. For example, due to the shortage of food, a farmer might sell all the cattle that would typically be ready for market in a given year early in the season. If the remaining herd were still too large to take care of, the farmer would then look to liquidate additional livestock that would not usually go on the market, such as cow-calf pairs or underage calves that would normally come up for sale in a later year. The total income for the additional cattle sold, above and beyond the cattle that the farmer would normally sell, would be eligible for deferred recognition for tax purposes. Depending on the financial situation, the farmer could also replace any breeding cattle the following year, filing a gain or loss based upon the cost basis of the breeding animals sold during the drought, plus any gains or losses incurred, as measured by the difference between the price of the drought sale animals and the price of their replacements.