Green Horizons

One of the most important things a person can do when they acquire timberland is establish a basis for all assets on the property. Those assets include the land, the timber and the buildings or . xtures that are attached to the land. Depending on how the land is acquired, the basis of the property can either be based on the fair market value at the time of acquisition (if inherited), the purchase price (if purchased), the donor's basis (if received as a gift), or the adjusted basis of the exchanged property (if exchanged). However, there are many exceptions and additions to these rules.

The purpose of this article is not to discuss all the "ins-and-outs" of calculating basis, but to emphasize the importance of properly establishing a basis for the timber portion of property when it is acquired. One of the most common mistakes that a landowner makes when they acquire property is failing to properly establish a basis for the timber asset on the property. This mistake often goes unnoticed until a timber sale is conducted and the landowner is faced with a large capital gain with no offsetting costs.

A simple solution to this problem requires contacting a professional forester to conduct a timber appraisal at the time of acquisition. A good timber appraisal will identify the size, class, species, and current value per board foot, as well as, the estimated growth rate and location of the merchantable trees. Pre-merchantable trees (trees too small to be sold as pulpwood or other cut products) should be identi. ed by number of acres, species mix, location, and estimated value per acre. By obtaining this information, the landowner can calculate "depletion units". These depletion units can then be used to offset the income received in the future from timber harvests.

Good record keeping is also essential in reducing the tax burden when timber is sold. Records of costs incurred as a result of managing the timber can be added to the basis of the timber, thus increasing the depletion unit. Keeping records can be as simple as making journal notes of management activities or noting on checks and checking account registers describing money spent on forest activities.

Several guides have been written that discuss the value of calculating depletion units and the tax savings that can be achieved by this simple step:

1. Haney, Harry L. Jr., William L. Hoover, William C. Siegel and John L. Greene. 2001. Forest Landowners' Guide to the Federal Income Tax. U.S. Department of Agriculture Forest Service, Agriculture Handbook #718.
2. Dwyer, John and Shelby Jones. 2002. Determining timber cost basis. MU Agricultural Guide, Forestry, G5055. MU Extension: University of Missouri-Columbia. 2 pgs.
3. Dwyer, John and Larry Godsey. 2002. Controlling your timber sale tax. Missouri Conservationist . Vol. 63, No. 11, November 2002. http://www.mdc.mo.gov/conmag/2002/11/20.htm.