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Controlling Your Timber Sale Tax

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Published on: Nov. 2, 2002

Last revision: Nov. 12, 2010

taxable exchanges and nontaxable exchanges. For taxable exchanges of property, or exchanges where property is traded for other property that is not similar in use to the property exchanged, the basis is the fair market value on the date of exchange. For nontaxable exchanges, such as like-kind exchanges, the basis in the property received is usually the same as the basis in the property exchanged.

When you acquire a tract of forestland, there may be several assets on the land, such as fences, bridges, ponds, plantations, buildings, and merchantable timber. These assets are referred to as real capital assets. Most forest landowners just pay for the tract and do not know that they can separate or allocate the costs to acquire the property to each asset. That means that you can literally deduct the amount you spent to purchase the timber asset from the proceeds of any future timber sale. This is important because anytime you can subtract something from the sale proceeds, you effectively reduce your tax bill.

So, how do you do it? First of all, at the time you acquire the tract, you need to establish the original cost basis in this timber asset.

Determining the original cost basis in the timber asset is a process of calculating the proportionate amount of the original basis in the property as a whole that is allocated to the timber asset. It is best to do this allocation at the time of acquisition, but it may also be done years later if you have maintained good records by setting up an account for each of the timber assets, that would include the volume and value of the asset at the time of purchase.

The next step in establishing your cost basis in the timber is to have a trained professional forester conduct a timber inventory on your property to determine the quality and volume of forest products on your tract. If the timber inventory was not conducted at the time of purchase, a forester can "cruise" the timber and estimate both the current volume and what it was when you acquired the property. An estimate of the inventory value of the timber assets is also provided as part of the inventory.

The next step in this asset cost allocation process is to calculate the proportion (percentage in decimal form) of each asset to the total fair market value or appraised

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