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Timberland

Timber Topic: Why is the Tax Basis Important?

September 4, 2018

This is part 4 of a 5 part series on timber.

In part 1, we looked at some of the factors that affect timber value, and in part 2 we reviewed how foresters assess timber on a property. The 3rd part looked at Timber Management Plans and Present Use Value.

In part 4, we continue to focus on potential tax advantages by looking at why buyers and investors should establish a tax basis when they buy land with timber.

ESTABLISHING A TAX BASIS

When purchasing land with timber, there is value in both the land and in the timber stand. Landowners can sell the timber and retain the land to grow trees again. Establishing a tax basis allows the buyer to establish and record an estimated value of the timber at the time of purchase.

Later, when the timber is harvested, that previously established value can be used to reduce the total income produced by the harvest. It may also allow a deduction of a loss if the timber is stolen or destroyed. Let’s look at some simple examples.

EXAMPLE 1: TIMBER IS SOLD

An investor buys 25 acres of forestland and has a licensed forester perform a cruise and create a timber management plan. The forester estimates the value of the timber at $1,000/acre at the time of purchase for a total of $25,000 in timber. In 7 years, the owner notices that hardwood prices are up and many of the trees have grown from pulpwood into sawtimber, so he or she then decides it time to sell the timber. That logging produces an income of $2,000/acre, and the owner is paid $50,000.

Since the owner has a tax basis showing that the value of the timber when he or she purchased it was $25,000, the taxable amount from the sale is $25,000 instead of the entire $50,000. The landowner may also be able to deduct additional costs for managing the timberland such as the forester’s fees, costs to maintain the health of the forest, etc.

EXAMPLE 2: TIMBER IS LOST

That same investor has 25 acres with timber valued at $1,000/acre at the time of purchase. The following year, a forest fire burns 10 acres of the property, and all the trees are lost. The investor may be able to claim a loss of $10,000 on the investment on their taxes due to the fire and would leave a total remaining tax basis on the property of $15,000 for future use.

CONCLUSION

This is a complex issue with many variables. When acquiring woodlands, it is essential to consult with an accountant, attorney, forester and many other professionals to ensure that you have a plan in place to leverage tax advantages of ownership.

Additional information on this topic can also be found from the USDA Forest Service in their publication of 2011 Federal Income Tax on Timber, A Key to Your Most Frequently Asked Questions

I help my clients understand land and provide them with education and knowledge to make informed decisions.  If you’re looking for a professional land broker or need help understanding land issues like this, let me know! Pat Snyder, psnyder@nationalland.comwww.nationalland.com.

Disclaimer: This is not intended to be tax or investment advice by the author or National Land Realty. You should consult your accountant and/or investment advisor before making any decisions regarding taxes or investments.

About the Author
Pat Snyder joined National Land Realty in 2018. Pat is a retired US Air Force Officer with over 20 years of service and has several years of real estate experience. He is a Realtors Land Institute (RLI) member, Certified Negotiations Expert, and a Military Relocation Professional. He also serves as a board member on the Asheville Rotary Club and Blue Ridge Honor Flight. As a Land Professional in Western North Carolina, Pat enjoys educating clients on land sales and purchases and hiking properties with them. He also likes to work with other professionals to help his clients understand the opportunities and challenges of a land transaction, and help sellers get their land to stand out as an exceptional property to buyers before hitting the market. Pat holds a MA in Military Operational Arts and Science from Air University, a MS in Information Management Technology from Grantham University, and a BS in Management Information Systems from the University of Nebraska-Omaha. Pat enjoys spending time hiking, doing volunteer work and cooking. He and his wife Michelle have a son, Barrett, and a dog named Bacon. View Pat's Listings and Reviews on NationalLand.com