Buying timberland can provide landowners with fantastic wildlife habitats, recreational opportunities, and also the potential for a lucrative harvest down the line. To maximize the after-tax financial return of owning timberland, landowners need to establish a basis for their timber, which is typically done by conducting a timber cruise.

Here’s what you need to know about establishing a basis for your timberland for Federal income tax purposes!

What is Basis?

Basis refers to the original value of a property for tax purposes. When talking about timberland, basis includes the initial purchase price of the land and timber as well as any costs associated with the acquisition. Basis is essentially the starting point for determining capital gains or losses whenever timber is sold and has other tax implications as well (e.g., determining deductible timber casualty loss or theft loss).

The two main components of timberland basis are the land basis, which is the value of the raw land without factoring in the timber. The other component is the timber basis which is the value of the standing timber on the property.

How Do I Determine My Basis?

Determining the original basis of a property largely depends on the way that the new owner acquired the property. 

If the property is purchased, the original basis is the amount of the total acquisition costs allocated to the timber as well as any additional costs paid during the sale process. This includes things like attorney fees, surveying, timber cruises, advertising expenses, forester fees, and more.

The allocation of the total acquisition costs between assets (timber, land, and other assets) should be based on the proportion of the fair market value (FMV) of the asset to the total FMV of the property acquired. This requires estimating the FMV of each asset individually. 

If the property is inherited, the original basis is normally the fair market value of the property at the time of the decedent’s passing. This is typically known as a “step-up” in basis. Since a stepped-up basis reduces taxable profit when the timber is sold in the future, it helps reduce capital gains taxes for the heirs. If the property is acquired as a gift, the new owner receives the same basis in the property that the donor had. It’s known as the carryover basis. 

Basis increases when you capitalize expenses in the timber. It decreases when you have a timber sale, exchange, or involuntary conversion (e.g., casualty loss, theft, or condemnation). The basis remaining in the timber account after making these adjustments is the adjusted timber basis.

Timber Cruise to Establish Current Timber Value

Once a landowner has acquired timberland, the first step they should take is to allocate their basis and determine which portion of the original basis the standing timber on the property accounts for. 

This is done by looking at comparable sales figures to determine the fair market value of the land itself, then taking the values of the standing timber and calculating the percentage of the total value that the timber accounts for.

Timber basis is usually determined via a timber cruise, where a forester “cruises” the property and assesses the average size, quality, and volume of timber stands on the property. This is a crucial step in determining basis that every landowner purchasing timberland should seriously consider. 

It’s best to enlist the help of a knowledgeable forester to ensure that the basis allocation is done accurately and the final timber basis correctly reflects the true value of the timber on the property.

Why Do You Need a Current Basis?

For any timberland owner, a current basis is necessary to create a comprehensive tax strategy that will benefit the landowner most. Failing to get an accurate understanding of the timber value on a property could result in landowners leaving money on the table or paying undue taxes.

An adjusted timber basis is used to determine taxable income from a timber sale since you can subtract the timber basis and selling expenses from the gross timber proceeds. Doing this will leave you with the amount of taxable income from that sale. This is why having a current basis is important. 

Taking the time and money to have a timber cruise conducted and working with an expert to devise a comprehensive plan can make a world of difference when tax season comes around.

If you want to learn more about valuing timberland or establish a basis for your timberland, get in contact with me at Schapman@NationalLand.com.