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Determining Your Timber Tax Basis

The Most Important Tax Consideration for a Timber Grower


Tax Graphic

Tax Graphic

Getty Photo/Claudia Uribe

Why is Your Timber Tax Basis Important?:

The determining of your timber tax basis is the most important part of reporting federal and sometimes state timber taxes. It is simply declaring, with some documentation, the value of your forest and timber when you purchase, inherit, are gifted or exchange timberland.

What is Your Timber Tax Basis?:

The basis of property is usually its cost, along with any other expenditures incurred to initially acquire the property. The timber value is a very important part of this property basis and should be determined.

Remember that the cost is the amount you pay in cash, debt obligations, or in other property which includes the timber value.

This timber basis is used to calculate the depletion unit needed to determine taxable gain or loss when you sell timber on the stump, cut timber, or dispose of it involuntarily, such as by a casualty, theft, or condemnation.

How Do I Determine My Timber Tax Basis?:

There are different methods you can use to determine your timber tax basis but the IRS suggests you base timber value on fair market value. The fair market value (FMV) of any asset is the price at which that asset would change hands between a willing buyer and seller. It is advisable to have a timber inventory done at time of acquizition.

There is an Alternate Method of Determining Timber Tax Basis!:

The other method is sometimes used when only land and timber are acquired. According to the National Timber Tax Website, "A reasonable market value for the bare land is subtracted from the total purchase price and the residual amount is allocated to the timber. The allocation of the timber and bare land can also be stated in the purchase contract by separately listing the purchase price of the timber and the land." This may be the way to go when only land and trees are involved.

How To Determine Timber Basis on Property With No Established Basis?:

The procedure is the same as doing it when the property was first acquired. You are required to estimate the timber account: the total units (bd. ft. measure, log scale, cords, or other units) of timber reasonably known to have existed on the ground on the date of acquisition. Any cutting must be removed from the original volume.

The original timber volume's fair market value on the date of acquisition must be determined. The best available evidence of timber values on this date and in that location must be used. Consulting foresters, timber buyers or published price reports may be used to determine this.

Are There Exceptions to the Rules as Per Acquisition?:

Yes! Please read about particular exceptions based on how your property was acquired: Purchased, Inherited, Gifted, Exchanged.

(all the above links to TimberTax.org)

How do I Adjust My Basis?:

According to the National Timber Tax Website, "The original basis of an asset will change as capital improvements, carrying charges, or other additions are made to the asset, or as allowances for depletion, amortization, or depreciation are deducted. The amount remaining in any account after changes have been made is the adjusted basis."

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