If a rancher is required to sell extra livestock related to drought or other weather events, the tax laws allow the rancher up to four years to replace that livestock with other livestock purchases. However, if the county or any contiguous county continues to be listed as having exceptional, extreme or severe drought during the previous twelve month an additional one year period is granted to defer the gain.
As we have discussed previously, in many cases, it is better to actually report the taxable income from the sale of the livestock, versus deferring the gain. For example, assumed raised breeding stock is sold after two years. These sales are subject to capital gains treatment and usually this tax is much lower than regular income tax and this income is not subject to self-employment tax. Therefore, by reporting the gain and then depreciation the full purchase price of replacement livestock or other equipment purchases, the rancher is usually better off from a tax standpoint.