WVFA Spring 2019

I N D U S T R Y N E W S www.wvfa.org Spring 2019 |  West Virginia Forestry Association Mountain State Forestry 17 Timber Sales and Reporting To be eligible for the beneficial long-term capital gains, you must own the standing timber held as an investment for more than one year before the sale (inherited timber is automatically considered long- term). Timber sale expenses are deductible from the sale proceeds. Report the sale of standing investment timber on Form 8949 and Schedule D. Example 3: Ms. Johnson sold hardwood standing timber she inherited 10 years ago for $12,000. The timber is an investment for her. Assuming the selling expense was $500 and the timber depletion (see topic below) was $4,000, she will report $7,500 ($12,000 - $4,000 - $500) as a long-term capital gain on Form 8949 and Schedule D. Example 4: Assuming the same facts as above in Example 3, except that the taxpayer is classified as timber business. In this case, the gain of $7,500 would qualify as a capital gain. However, if the business taxpayer cut his timber (or had “a contract right to cut” the timber) to sell or to use in his trade or business, different rules apply. Under this sales method, capital gain treatments (Sec. 1231 gain) are available when the taxpayer has owned such timber for more than 1 year and elects to treat the cutting as a sale. The election is made on Form T, Part II. Example 5: Mr. Jones is a logger and manages his Douglas fir timber as a business. He cut his timber himself and delivered and sold the logs to a mill for $20,000. Assuming the fair market value (FMV) of the standing timber on January 1, 2018, was $15,000, and his timber depletion (see below) was $2,000, under Sec. 631(a) election, gains of $13,000 ($15,000 - $2,000) from standing timber are capital gains, and the $1,000 ($20,000 - $15,000 - $4,000 cut-n-haul cost) from the sale of felled timber is ordinary income. Timber Basis and Depletion Deduction Generally your timber basis is the amount you paid for it (if you purchased the property). For inherited property, it is the timber’s fair market value on the decedent’s date of death. Example 6 (a): Six years ago, Mr. Forrest inherited a tract of timberland. A professional appraisal had retroactively established the timber basis as of the date of death, which consisted of $16,000 for 80 thousand board feet (MBF) of pine sawtimber and $5,000 for 250 cords of pine pulpwood. Timber depletion is a deduction against the timber basis upon timber sale. Tax Tips for Forest Landowners for the 2018 Tax Year by Dr. Linda Wang, National Timber Tax Specialist, USDA Forest Service United States Department of Agriculture Forest Service FS-1122 October 2018. Example 6 (b): Mr. Forrest sold 50 MBF of sawtimber. His depletion was $10,000 ($16,000 of total timber basis ÷ 80 MBF of total volume x 50 MBF of timber sold). Timber and Landscape Tree Casualty Loss Depending on the type of properties affected, loss of timber and landscape trees due to a casualty event such as hurricane, fire, earthquake, tornado, or hail or ice storms may be tax deductible. For timber held as an investment or a business, the loss deduction is the smaller of the adjusted basis of timber and the difference of the FMV of the timber immediately before and after the casualty in the block. Report salvage sale of timber separately. A taxable gain may result if the salvage sale exceeds the adjusted basis of the timber and related selling expenses. Example 7: Mr. Brown owned a woodland as an investment. A professional appraisal documented a $5,000 timber loss from hurricane damage. Assuming his timber basis was $1,000, the amount of casualty loss deduction would be limited to $1,000. For 2018 landscape tree loss at a private residence, the deductible casualty loss would be limited to federally declareddisasters. Installment Sales Using Form 6252, a taxpayer may defer taxes by spreading the gain from the property sale over two or more years. Example 8: Mr. Davis sold $10,000 of timber ($7,500 after deducting timber depletion and sale expenses). His gross profit percentage was 75 percent ($7,500 ÷ $10,000). The buyer paid him $6,000 in 2018, and he took a note payable in 2019. Report a $4,500 gain ($6,000 x 75%) for 2018. Interest charged on deferred payments is ordinary income. Reforestation Costs Reforestation costs are tax deductible. Taxpayers may deduct up to $10,000 ($5,000 for married couples filing separately) per year per qualified timber property (QTP). Any amount over $10,000 per year per QTP may be deducted over 84 months (amortized). Trusts are eligible for amortization only. continues on next page »