Part 2 Farmers and Rental Real Estate question: drought in an area designated for federal assistance

Part 2Farmers and Rental Real Estate

Because of a drought in an area designated for federal assistance, a cash-method rancher sold twice her usual number of cattle held for sale. She does not plan to replace them. What relief is available?

A Deferring gain only if she buys replacements within 2 years
B Excluding the gain on the extra animals from income permanently
C Treating the sales as an involuntary conversion of all her cattle
D Postponing the gain on the extra animals to the next year

Show the answer and explanation

Answer: D. Postponing the gain on the extra animals to the next year

Under section 451(g), a cash-method farmer whose principal business is farming may elect to report income from the additional livestock sold because of a weather-related condition in the year after the sale, if the area is designated for federal assistance. Replacement is not required. The section 1033(e) rule for draft, breeding or dairy livestock does require replacement. Source: IRC 451(g), 1033(e); Pub. 225 (2025), Table 3-2. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake

Requiring replacement for the one-year postponement rule.

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Original study material mapped to the public IRS SEE content outlines; not a real exam question.Not affiliated with or endorsed by the IRS or PSI. Verify figures and rules against current guidance before relying on them.