January - March 2014
Why You Need a Timber Cost Basis When Considering the Sale of Timber
By: Shelby Jones
Timber cost basis is a term that is not familiar to many landowners or timber buyers, but it can impact all because of its influence on the sale of timber by private landowners. Timber cost basis relates to federal income tax regulations and the amount of investment in a capital asset by the owner of standing timber at the time of purchase of the purchase of the land or inheritance. Having a timber cost basis usually means lower federal income liability by the owner when there is income generated from the timber such as when a timber sale occurs. Having a documented basis is one step in qualifying for capital gains treatment of the net profit from a timber sale. The operative word is gain which implies that certain deductions can be subtracted from the timber sale proceeds to reduce the amount on which federal taxes are due.
Services of a professional forester are usually necessary to complete the process of calculating the timber cost basis. It is important to note here that timber inventory should be completed prior to any timber harvesting. Measuring standing volume and grade is nearly impossible once trees are cut!
First, a timber inventory or "cruise" is completed to determine the current volume of timber on the property, by species and grade. Average growth rates of the predominant species is also measured. If the property was purchased recently (i.e. no more than one growing season has elapsed), a current market value for the standing timber can be calculated. If the property was purchased or inherited several years ago, the forester can calculate the volume that was present on the purchase date by using the growth rate as a discount rate and the use of timber growth & yield software programs. Historic records of stumpage prices are available in Missouri as far back as 1991 through Missouri Timber Price Trends. Thus, it is possible to determine the timber cost basis of properties acquired many years in the past.
If a landowner has a Stewardship Plan or other timber management plan that was prepared during the current ownership, it is possible that sufficient data exists to calculate a timber cost basis without completing a new inventory, thus saving expenses. Cost basis information is NOT generally provided within a Stewardship Plan, but some consulting foresters provide it as a free or low cost service when they compile the plan. It is a good idea to check your plan to determine if you are the lucky recipient of this service.
Second, the forester will combine the inventory growth and yield data, historic stumpage information, and land sale/appraisal information from the landowner to calculate the estimated value the landowner has invested in his standing timber asset. The results are usually entered into a Form T, federal tax form to be kept with valuable records by the landowner. Additional parts of the form will be completed when a timber sale is made and the form will become part of the owner's tax filing for the appropriate tax year.
There are a few cautions for landowners who are interested in completing a timber cost basis for their property:
- Use a professional forester. The inventory process and subsequent analysis is not a do-it-yourself exercise. Currently, this will be an expense for you as it will be necessary to engage the services of a private, consulting forester. (Public agency foresters are not permitted to provide income tax related information to private individuals, although they often complete a timber inventory and management plan without charge, which a consulting forester can use for the cost basis analysis) However, the fees of the consulting forester enter into the calculation of the cost basis, so they are actually deductible.
- There may be a Certified Appraisal having been completed as part of the purchase or inheritance process for the property. This appraisal may or may not include an estimated value for your timberland! Real estate appraisals rarely include any estimate of the value of the actual trees or the volume of potential wood products. The values in a real estate appraisals generally reflect LAND values and may or may not be indicative of what is actually growing there. A forester will be able to work within the values listed in the appraisal to determine the appropriate amount to be associated with the value of the standing timber with the remainder allocated to a bare land value. Real estate appraisals are not generally recommended for calculating timber cost basis.
- If you are contemplating a timber sale, consider the services of a professional forester to assist with the entire process. It is very important that you know exactly what you are selling, terms and conditions of the sale, and your responsibilities to the buyer. A forester can provide the guidance necessary for an optimum outcome for both the buyer and the seller. They can also help you prepare figures for your tax accountant who may not be familiar with the unique aspects of timber tax regulations.
For more specific information regarding timber sale income and taxes, there are three (3) Guide Sheets available from the University of Missouri. Free copies can be downloaded from the following website. http://snr.missouri.edu/forestry/extension/publications.php
Managing Your Timber Sale Tax, # G5056 by John Dwyer, Larry Godsey, and Hank Stelzer.
Determining Timber Cost Basis, # G5055 by John Dwyer and Shelby Jones
Selling Timber: What the Landowner Needs to Know by Hank Stelzer, # G5051.
The National Timber Tax website is an excellent source for answers to all timber taxation questions.