As described in Part 1 of our Forest Landowner Basics series, a timber cruise is a statistical sample conducted by a forester that is designed to locate and estimate the quantity of timber on a specific area of land at a specific point in time. During a cruise, foresters record different attributes of the individual trees growing in the designated sample areas, including the species, size (diameter at breast height and height), the tree’s quality or grade and the tree’s expected product type or use. During a cruise, foresters can also gather useful information about the tract, including spatial data for creating maps of the property, and they may assess wildlife habitat conditions, survey for endangered species or other nontimber resources (e.g., medicinal plants), look for signs of illegal activities (e.g., timber theft) and record many other details the landowner may want to know about their stand.
Since a timber cruise is basically a snapshot of our stand, it is logical that we should get our timber cruised intensively at each important milestone for the stand. The first important milestone is within one year of acquiring the tract. This cruise should happen whether the forest land was purchased or inherited. This initial cruise is important because it gives you the information you need to develop a management plan for the stand, and it provides information you need to determine your timber basis for the tract. In Part 2 of the Forest Landowner Basics series, we’ll take a closer look at what exactly a basis is and why establishing basis is so important to forest landowners.
Simply put, basis is the amount of money invested to acquire a tract of forest land. Basis includes all acquisition costs including the purchase price, legal costs, cruising and appraisal costs, title searches, title insurance, survey costs and any other costs associated with the purchase. Since timber has a unique value on every tract of forest land and the land has a unique value on every tract, the Internal Revenue Service allows forest landowners to divide the total basis for a tract of forest land into timber basis and land basis. The timber basis is the cost of the timber, fair market value, at the time of acquisition plus any other costs directly associated with the acquisition of the timber. The land basis is the cost of the land, fair market value, plus the value of improvements on the property plus any costs directly associated with the acquisition of the land. For forest land acquired by inheritance, the IRS allows the new owner to establish a stepped-up basis for both the timber and the land based on the fair market value of both at the time of inheritance. Please remember that proper documentation is crucial when calculating initial basis and making adjustments to your basis during your ownership.
Now that we know what basis is, we will look at two of the benefits of establishing timber basis on a tract and why basis is so important. First, from the standpoint of the IRS, timber basis is the documented cost basis a landowner has in the timber. In the event of a timber sale, the income tax a landowner must pay is the difference between the price paid to a landowner and the timber basis the landowner has in the harvested timber. For example, if a landowner is paid $27 per ton for pine sawtimber in a pay-as-cut sale on a tract and the timber basis on the tract is $25 per ton, then the landowner is only responsible to pay taxes on the gain of $2 per ton. However, if initial timber basis has not been calculated the IRS treats the entire $27 as profit and the landowner is responsible for paying income taxes on a gain of the entire $27 per ton. To conclude our example, the tract our landowner owns is 40 acres and the harvest averaged 60 tons, two loads, per acre of pine sawtimber. If the revenue was taxed at the current capital gains rate of 15%, having a documented basis saves our landowner $9,000 in federal income taxes. From our example you can clearly see the difference the having a timber basis makes to your bottom line.
Second, and more important in the event of a catastrophic loss of timber from a storm or fire, timber basis is the primary factor that determines whether a landowner can claim a casualty loss deduction on income taxes. According to IRS rules, “a deductible casualty loss for timber held mainly for business purposes is the smaller of the adjusted basis of timber and the difference in the fair market value of the timber immediately before and after the casualty.” What does this mean in real terms? If a landowner had no documented timber basis on a tract the IRS rules declare that the timber basis in the tract is zero. Since the IRS rules for a casualty loss deduction say a landowner is only entitled to deduct the lesser amount, a landowner would have no casualty loss deduction for lost timber since zero is the lesser number. Yikes!
Our world and our forests continue to change, sometimes at an alarming rate. The good news for forest landowners is that there are many knowledgeable people who can help you navigate through change. In Part 3 of our Forest Landowner Basics series, we’ll cover how professional foresters can help us meet our goals and what we should consider when selecting a forester for the job. Stayed tuned!
Robbie Hutchins is a forestry extension agent in central Louisiana.