Colorado farmers and ranchers might benefit from the disaster declared by President George Bush last summer. The declaration, which Bush signed June 19, 2002, said that a major disaster existed in Colorado because of fires.
The presidential declaration may give some ranchers an option to use revenue they generated by selling breeding livestock to purchase other property as long as that property is used for business purposes, according to Jeff Tranel, Colorado State University Cooperative Extension agricultural economist. That means that farmers and ranchers who sold more than normal numbers of breeding stock may benefit from the disaster declaration.
"Farmers and ranchers who qualify may purchase another type of asset, say a piece of machinery, equipment or a vehicle, as long as the tangible replacement property is used in a trade or business operated by the producer," said Tranel. "The replaced property, such as livestock, may be either property held for productive use or property held for investment. The replacement property can be any tangible property held for productive use."
Many of Colorado’s livestock producers were forced to sell breeding livestock due to drought and fires. These transactions are treated by the Internal Revenue Service as an involuntary conversion. Producers meeting certain criteria may take a 1033(e) election to not recognize capital gains if breeding livestock are replaced with "like kind" animals. Presidential disaster status may free producers from "like kind" replacement restrictions.
Even with the elimination of "like kind" restrictions, producers still have a two-year time frame to purchase replacement property – until Dec. 31, 2004, for breeding livestock sold in 2002. If a producer does not replace breeding livestock, including reinvesting the money in some other tangible property, he must report the gain.
Counties that fall under the presidential declaration include the entire state of Colorado along with the Southern Ute and Ute Mountain reservations, except Prowers, Logan, Morgan, Philips and Sedgwick counties. The declaration differs from the disaster declaration by Ann Veneman, secretary of agriculture. That declaration was due to drought and includes different counties than the president’s declaration.
With the flexibility to purchase other types of assets, producers will want to be aware of implications for the new tax basis on assets they acquire. Two examples illustrate these implications. A producer is forced to sell 100 head of raised breeding cows (zero tax basis) more than the normal annual breeding cow sales and receives $600 each for a total of $60,000. The producer’s potential gain is $60,000 due to a zero tax basis for the raised breeding livestock. The producer uses these proceeds to help purchase a new tractor for $75,000. The tax basis in the tractor (depreciation) will be $15,000, not $75,000. The tractor basis is adjusted for the $60,000 gain on livestock that is not reported. Example two: The same producer purchases a new swather for $45,000 and does not use any of the remaining $60,000 to acquire new assets, so the additional money is kept. The tax basis in the swather is zero and the producer will eventually report a gain of $15,000 from the sale of livestock.
"Colorado’s farmers and ranchers should contact their tax preparers regarding the various options available to them for managing their tax liabilities," said Tranel. "The ability to make certain tax code elections varies according to individual circumstances, and the implications of different strategies will be different for individual producers."