When Drought Forces Your Hand
How Section 1033 Lets You Defer the Gain on Breeding Stock
This post is Part 1 of a 3 Part Series.
Pastures are burned up, hay is $300 a ton, and you just sold 200 cows you never intended to sell. The last thing you need is a massive tax bill on top of everything else. The good news: Congress anticipated this exact situation and wrote Section 1033(e) specifically for it. Here’s how it works.
Every drought season we get emails from ranchers who are stunned by the tax bill sitting on their desk. They sold raised breeding cows at $4,500 a head — animals with zero basis — and suddenly they’re staring at $400,000 or $500,000 of taxable gain. What they didn’t know going in is that the tax code treats those sales very differently from a normal cull. If you qualify, you may be able to defer every dollar of gain until you’re back on your feet and rebuilding the herd.
What Section 1033 Actually Does
Section 1033(e) of the Internal Revenue Code classifies the drought-forced sale of breeding, dairy, or draft livestock as an involuntary conversion which is the same as a barn fire or a government condemnation. That classification is enormously valuable, because it lets you defer recognition of any gain as long as you replace the property within the allowed replacement period.
Note what’s excluded: poultry never qualifies. And the livestock must be held for breeding, dairy, or draft purposes — feeder cattle and market animals don’t get this treatment. The simpler one-year deferral available for those animals is covered in Part 2 of this series.
