Controlling Your Timber Sale Tax

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Published on: Nov. 2, 2002

Last revision: Nov. 12, 2010

For forest landowners who have or are contemplating the sale of their timber it is never too early to begin planning for the inevitable deadline with Uncle Sam. For many forest landowners, the end of the tax year can be particularly disconcerting because of the tax considerations for how to treat the sale of timber.

Proceeds (gain) from the sale of your standing timber are fully taxable. However, the proceeds from your timber sale can be reduced by deducting (subtracting) certain costs associated with the sale as well as the original cost of acquiring the property.

Costs of sale can include retaining the services of a consulting forester to inventorying your timber, estimating a value, marking the trees, marketing the timber, and administering the sale. Other costs of sale that you might incur include paying a lawyer to draft a timber sale contract and transportation costs associated with checking on the timber sale operation yourself.

The original cost of the property is based on the manner in which you acquired the property. The Internal Revenue Code (IRC) recognizes four methods for acquiring real property. You might inherit it, purchase it, receive it as a gift or exchange it for something else.

The taxable basis for property that has been inherited is, in most cases, the fair market value of the property on the date of death.

For property you have purchased, the basis in the property is the cost basis. This includes the amount you pay in cash, debt obligations, other property or services; recording fees, legal fees, abstract fees; transfer taxes; owner's title insurance; and any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs and sales commissions.

Property you acquire through a gift will most likely have a basis equal to the adjusted basis of the person who gave you the property, as long as that adjusted basis is not greater than the property's fair market value on the date of the transfer. The adjusted basis is the original cost plus any improvements and minus any deductions from that original cost. There are some exceptions to this rule, and the IRS allows you to add any gift tax that you might pay to that adjusted basis.

Basis in exchanged property gets even more complicated. The Internal Revenue Service (IRS) recognizes two kinds of exchanges:

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