The IRS has released important guidlines in September 2025, granting extended tax relief for farmers and ranchers affected by extreme drought across the 49 contiguous states, the District of Columbia, and U.S. territories. The guidance is incorporated in IRS Notice 2025-52, which provides relief to even more eligible taxpayers who need additional time to replace livestock they sold due to drought, and it allows the deferral of capital gains tax that results from forced sales.
As drought conditions are becoming more severe across the entire United States of America, having this relief is necessary to allow farmers and ranchers to maintain their agricultural livelihoods by either relieving them from tax burdens in the present or letting them recover when they replace their herd. Learn more
What Is IRS Notice 2025-52?
The Internal Revenue Service has issued IRS Notice 2025-52 providing relief to agricultural producers impacted by drought by extending the livestock replacement period under Internal Revenue Code Section 1033(e) to four years. Typically:
- Sales or exchanges of livestock due to drought will give the producer the ability to continue to defer capital gains if the livestock were replaced in a “replacement period.”
- In the 2025 taxation year, the IRS is extending the replacement period from two years to four years, plus an additional year in the drought-free year after the four years.
Essentially, producers that are set to replace the livestock at the end of the 2025 calendar year now will have until the end of their tax year beyond the first drought-free year following 2025. If a producer could wait until 2026 before replacing the livestock, that could mean funding the replacement of the livestock as late as the end of 2031 (6 years).
The IRS annually publishes a list of qualifying counties, parishes, or jurisdictions that are eligible to qualify as a drought-stricken area to make this determination as well.
What Areas Qualify?
To receive drought relief, the drought must be in any county or jurisdiction "designated" as experiencing an "exceptional", "extreme", or "severe" drought condition in any given week during the period between 9-1-2024 and 8-31-2025.
The list here was published and includes 49 states, the District of Columbia, Guam, the Northern Mariana Islands, and any jurisdiction during this designated period.
This expansive list of geographic coverage reflects the historic drought afflicting nearly the entire country.
Types of Livestock Covered by the Relief
Understand the types of livestock covered by the relief provided:
- Livestock raised for draft (work animals), dairy, or breeding purposes are eligible for the Assistance Program.
- Sales of livestock that have been raised solely for slaughter or sporting purposes and poultry do not qualify for the program.
- Taxpayers need to show that the sale or exchange is directly attributable to drought in a federally designated eligible area.
How Does the Replacement Period Extension Work?
The typical replacement period for livestock sales due to drought is 2 years, but the new relief provides farmers with a replacement period of 4 years.
- The IRS also allows one extra year to the end of the taxpayer's first tax year after the first "drought-free" year beyond the 4-year period.
- For example, if a taxpayer has a 4-year replacement deadline of December 31, 2025, and the designated area has not been drought-free during the 2025 tax year (after August 31, 2025), the taxpayer's deadline to replace livestock extends to the end of the 2026 tax year or later, depending on when drought breaks.
This provision will assist producers who continue to deal with long-term drought impacts by allowing a reasonable time frame to rebuild herds without tax implications immediately.
Eligibility Criteria for Tax Relief
For availing the tax relief as a taxpayer, the taxpayer must:
- Be a farmer or rancher who had to sell or exchange livestock solely because of drought.
- Have livestock with the intent to draft, produce dairy, or for breeding quality.
- Reside or sell livestock in the federally designated drought circumstances as identified by the appendix to the Notice.
- Utilize the extended replacement period to replace a sold or exchanged livestock to defer gain recognition.
How to Report the Relief on Tax Returns
Here is how you can report your relief on tax returns:
- Use IRS Form 4797, Sales of Business Property, to report sales or exchanges of livestock.
- Attach a detailed statement to your return describing:
- the type of livestock sold, and the purpose of the livestock,
- the drought disaster designation and the relevant county or jurisdiction,
- the reason for the forced sale or exchange,
- Your plans and timeframe for replacing the livestock.
- Read IRS Publication 225, Farmer's Tax Guide, for instructions and examples on how to report the sale.
Adequate support and documentation are important to avoid disallowing the deferred gain treatment and related penalties.
Strategic Tax Planning Tips for Drought-Affected Producers
Learn these strategies:
- Keep comprehensive records: Meticulously document the dates of sales, amounts received, and overall classification of livestock type.
- Monitor the drought status: Check with the National Drought Mitigation Center regularly so you are aware of when drought-free years resume.
- Plan for replacements: Note that you should plan purchases to take advantage of any lengthened replacement periods to retain deferral.
- Talk to tax professionals: Have tax professionals who know IRC 1033(e) and state agricultural tax provisions.
- Consider additional assistance: There may be other USDA assistance, disaster loans, or grants, in addition to tax deferrals.
- Review estate and succession plans: Timing the sale of livestock can have implications for your farm business value and continuity within your family.
- Consider cash flow impact: Use tax deferrals to help ease cash demands when trying to recover from the drought and rebuild your operation.
Economic and Environmental Impact of the Relief
- The IRS tax deferral provides time for purchasing replacement livestock, which stabilizes farm income during a historic drought.
- This provision shields taxpayers from being taxed on capital gains that are triggered, even if the sale was completed under duress, and maintains necessary working capital.
- This provision allows for a viable herd and long-term food production sustainability.
- It demonstrates the federal government’s responsiveness to climate variability and climate change and the ag sector’s economic vulnerability.
Available Resources and Support Channels
Get an idea of these resources:
- IRS Notice 2025-52 PDF: Authentication information on counties and county instructions.
- IRS Publication 225: Information on tax filing and reporting, including detailed and specific directions.
- National Drought Mitigation Center: Up-to-date drought severity and data maps.
- USDA Department of Agriculture: Coordinate complementary disaster programs and resource emergency funding.
- Local Extension Service: Technical and financial counsel on the ground.
Helpful Links
- IRS Guidance on Qualified Tips and Tipped Occupations
- IRS Cracks Down on Tax Scams Linked to Social Media: Penalties Soar
- How Professional Bookkeeping Helps You Stay IRS Audit-Ready
The extension of tax relief for farmers and ranchers affected by drought was provided by the IRS through Notice 2025-52 and provides much-needed financial breathing space for those affected by widespread and severe drought conditions. Eligible taxpayers receive extended replacement periods of up to six years, which creates relief from taxable capital gains and allows for herd recovery and agricultural resiliency. The drought impacts are still felt across the nation, and understanding these provisions and building them into tax and operational planning is beneficial for staying afloat through environmental uncertainty.
Stakeholders should avail themselves of IRS relief offered, keep comprehensive records, and consult tax professionals to ensure compliance while maximizing benefits for the drought relief provisions.
Contact The Fino Partners today for expert guidance in this matter and other IRS guidelines.
