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Determining Your Timber Casualty Loss

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Determining Your Timber Casualty Loss

Timber Storm Damage

Philip Wilson

What is Considered a Timber Casualty Loss?:

Trees damaged by fire or storm may entitle the owner to a federal tax deduction in the form of a "casualty loss" during the taxable year. This includes tangible losses to both timber and shade trees. You still must attempt to salvage the trees for any remaining value to qualify.

Timber casualty losses occur when sudden, unexpected and unusual events damage your trees. The first step toward claiming that loss is to document the damage. Take pictures to show the actual property damage before cleanup efforts begin.

How do You Begin the Timber Casualty Loss Process?:

A timber owner has to have made an honest attempt to salvage the damaged timber and accepted any price, even if forced to sell at a lower tree grade. If no buyer can be found, proof of any or all refusals should be documented. So, in theory, if a timber owner has documented the damage and attempted a sale, he/she may deduct all or part of the resulting timber casualty "loss".

Your 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.

Basic Rule for Timber Casualty Losses:

The National Timber Tax Website says, "The amount of the deductible loss is the lesser of - (1. The decrease in the fair market value of '"single identifiable property (SIP),'" or, (2. The adjusted basis of the "'single identifiable property,'" less any insurance proceeds, salvage value or other compensation received. Timber losses may be deducted up to the "adjusted basis" but not on the fair market value. That basis is generally what you originally paid for the timber plus any planting costs. The deduction cannot exceed that adjusted basis.

You Do Not Get Fair Market Price for Damaged Timber!:

The timber casualty deduction is based, not on timber's fair market value but on your adjusted basis. Many, if not most, owners of timber have a very small basis because the property was purchased decades ago or the timber naturally reseeded or the basis has already been depleted. If your basis is determined to be zero then your loss deduction will be zero. File the deduction on IRS Form 4684, Section B to report the loss.

Determining the Timber Product Income Value as a Business or Investment:

The loss is determined separately for each timber product. Thus, if the ornamental trees around a commercial building were destroyed, the loss would be limited to the lesser of the decrease in the fair market value of the trees, or basis of the trees destroyed. For Timber the "single identifiable property" (SIP) is either (1) the individual units of timber -- cords, board feet, etc., or (2) the block of timber.

The National Timber Tax Website has more about timber casualty losses and losses to "Shade Trees".

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