Introduction to Timber Basis

A consulting forester is a major financial asset to forest land owners.  In addition to helping forest land owners save on property taxes, acquire cost share funds to help manage their property, and to substantially increase timber sale revenue, consultants also help reduce the gross taxable gain following a timber sale.  They do this by establishing a timber basis for the landowner at the time of purchase.  Failure of a landowner to establish their timber basis can result in a very costly error in the future. 

When a landowner decides to sell their timber, the revenue from that sale is either taxed at the long-term capital gains rate or as ordinary income.  The tax rate in either case is based on the net taxable income from the sale.  The net taxable income is equal to the gross proceeds from the sale minus expenses related to the sale and minus the basis in the timber.  By subtracting the timber basis from the gross proceeds of the sale, called basis recovery, gross taxable gain can be significantly reduced if not eliminated. 

When land is purchased, the amount paid for the land at the time is called basis.  Some land contains timber, which is an asset that can be sold separately from the land.  Therefore, the basis in the property needs to be assigned to either a land account or a timber account.  The amount of money in the timber account it called the timber basis.  The first step to establishing a timber basis is to conduct a forest inventory and timber appraisal.  This will provide the total board footage on the property at the time of purchase, and the fair market value of the timber at the time of purchase.  The fair market value of the land also needs to be determined.  The sum of the fair market value of the timber and the land is equal to the fair market value.  Once the fair market value of the timber is calculated, it is divided by the total fair market value to get the proportionate value of the timber, or percentage of the timber value that makes up the total fair market value.  Multiply the proportionate value by the original purchase price, and the timber basis is calculated. 

Here’s a basic example:

A landowner purchases 40 acre of forest land for $120,000.  The only fees were from a forest inventory to acquire the fair market value of the timber.  It cost $500.  Therefore, the total purchase price is $120,500.  The forest inventory found the property had 100,000 board feet for a total value of $20,000.  The land appraised for $3,500 per acre, for an appraised value of $140,000.  Therefore, the total appraised value of the property was $160,000.  (Note the total appraised value is not the amount paid for the property.) 

Table 1.  The basic information needed to begin calculating the timber basis. 

Total acres

40.00

Forested acres

40.00

Purchase price

 $ 120,000.00

Foresters fees

 $         500.00

Total Purchase price

 $ 120,500.00

Board Footage per Acre

2,500.00

Total Board Footage

100,000.00

Average price per bd. ft.

 $             0.20

Timber value per acre

 $         500.00

Total timber value

 $   20,000.00

Land value per acre

 $     3,500.00

Total value for land

 $ 140,000.00

Total appraisal value

 $ 160,000.00

To allocate the appropriate amount of the original purchase price to the timber account, the fair market value of the timber is divided by the total fair market value, which equals 12.5%.  This number is multiplied by the original purchase price to allocate the correct amount to the timber account.  This allocated $15,062.50 to the timber basis account. 

Table 2.  The account table that allocates the proportionate amount to each account based on the proportion of total fair market value that is attributable to each account.

Account

FMV

%FMV

Basis

Depletion Unit

Land

 $ 140,000.00

87.50%

 $ 105,437.50

 

Timber

 $   20,000.00

12.50%

 $   15,062.50

 $               0.15

Improvements

 $                  -  

0.00%

 $                  -  

 

Total

 $ 160,000.00

100.00%

 $ 120,500.00

 

Calculating the timber basis serves one purpose, to find out the depletion unit.  The depletion unit is simply the original timber basis divided by the total volume in the timber account at the time of purchase.  In this example, the depletion unit is 100,000 board feet divided by $15,062.50, for a unit of 0.15 cents.  The depletion unit is what is used to calculate the basis recovery after a timber sale.  For example, the landowner has a timber sale in which 50,000 board feet were harvested for a total value of $17,500.00.  To calculate the deduction, multiply the total board footage sold by the depletion unit, which is 50,000 times 15 cents, or $7,500.  This is the depletion allowance, and is subtracted from the total sale amount in order to determine the net taxable gain.  This landowner will pay taxes on $10,000 of income instead of $17,500.  In addition, the fees used to conduct the timber sale, such as the consulting forester fees, boundary marking or survey fees, can also be deducted as an expense.  If the landowner had a consulting forester conduct the sale, and the fee was $500, then the net taxable gain decreases further to $9,500.

To calculate the new timber basis, or amount of money that is still available to deduct during future timber sales, subtract the original timber basis of $15,062.50 by the depletion allowance, or $7500.  The new basis that carries forward for use in the future is $7,562.50. 

 Table 3.  Adjusted basis following a timber sale.

Adjusted basis

 $   15,062.50

Depletion allowance

 $7,500.00

Taxable income

 $     10,000.00

New adjusted basis

 $     7,562.50

The monetary benefits to a landowner when working with a consulting forest are many, and calculating and utilizing timber basis is just one example.  Check out the Illinois Consulting Foresters website to find a consulting forester near you at www.illinoisconsultingforesters.com.

*Calculating timber basis can be very complex, and the techniques used to calculate basis differ depending on how the property was acquired.  This is a basic example that illustrates the benefits of having your timber basis calculated.  For more information that is specific to your property, contact your consulting forester.