In its simplest form, timberland value is comprised of two components (capital assets): bare land and standing timber. The amount invested in each component is called the “tax basis.”
The timber portion of the “tax basis” should be established as soon as possible after purchasing or inheriting property. Inherited property is allowed to be assigned a “stepped-up” basis to fair market value as appraised for the decedent’s estate at the time of death. By establishing the timber’s tax basis, a landowner can sell timber and only be taxed on the increase in the timber’s value (due to growth, inflation, market increases).
Example: In 2009, Mr. Smith purchased 100 acres (at a fair market value of $275,000) that contained a 50-acre stand of 30-year-old loblolly pine. At the time of purchase, his consulting forester appraised the timber at $125,000 (timber tax basis). In 2016, Mr. Smith met with his consulting forester and decided it was time to sell (clearcut) the stand. His consultant handled the sale and received competitive bids. Mr. Smith received $175,000 in net revenues (sale price less consulting and legal fees).
To determine his taxable gain, Mr. Smith’s accountant subtracted the timber basis from the net sale price. $175,000 – $125,000 = $50,000 of taxable gain
Had the timber sale been a partial harvest (thinning, selective harvest), then only a proportionate amount would have been depleted from the timber tax basis.
What could Mr. Smith have done if he had not established a timber tax basis at the time of purchase? He could have had his consulting forester perform a back cruise. A back cruise determines present timber volumes, then “backs up” growth to the time of purchase. Those estimated quantities are then multiplied by historical timber prices to determine acquisition value.
A person who receives property as a gift also receives the giver’s tax basis values. Before gifting or accepting property you should always consider the tax ramifications. Often gifted property was acquired by the giver decades ago when land and timber prices were low, meaning the tax basis is very low and almost impossible to calculate for the timber due to the growth and mortality in occurred over that time span.
Capital Gains Tax
A capital gain is a gain (or loss) on the sale of a capital asset (in this case land or standing timber). To qualify for long-term capital gains tax rates the capital asset, one must own that asset for more than one year. For many landowners, it is an advantage to claim timber income as a capital gain. Tax laws and rates are subject to change so always check with your accountant or tax attorney to see if filing timber income as a capital gain will benefit you.
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Note: This article is not, nor is it intended to be a comprehensive tax guide. Landowners are always encouraged to consult a professional tax attorney or accountant for answers to specific questions.