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CLICK HERE FOR IRS FAQ KATRINA TAX RELIEF

*********************

OHIO STATE UNIVERSITY (How to Determine Your Timer Basis)

*********************

KATRINA LOSSES - TIMBER AND/OR TREES

BASIS IS THE KEY TO ANY LOSS.  IF BASIS EQUALS ZERO, THEN THE TAX LOSS WOULD BE ZERO.

THERE ARE THREE BASIC WAYS OF DETERMINING BASIS.  ALL THREE HAVE SOME EXCEPTIONS, OR ADDITIONAL RULES THAT MAY APPLY, BUT THESE EXCEPTIONS USUALLY DO NOT INCREASE OR DECREASE THE BASIS SIGNIFICANTLY.  THE METHODS ARE AS FOLLOWS:

HOW PROPERTY WAS ACQUIRED DETERMINES YOUR BASIS AND ANY GAIN or LOSS

1. PURCHASED/BOUGHT:  BASIS=COST: CASH PAID PLUS CERTAIN OTHER EXPENSES, SUCH AS SALES TAX OR CLOSING COSTS            

2. INHERITED:  BASIS= FAIR MARKET VALUE (FMV) ON DATE OF DEATH OR AN  ALTERNATE DATE, USUALLY 6 MOS AFTER DEATH

3. GIFT:  BASIS = THE SAME BASIS AS THAT OF THE DONOR (OR PERSON WHO DONATED THE PROPERTY).

AS YOU MAY START TO REALIZE, WHEN IT COMES TO TIMBER, OR TO A FEW SHADE TREES IN YOUR YARD, THE TAX LOSS MAY NOT BE AS LARGE AS YOU WOULD HAVE HOPED FOR. MISSISSIPPIíS GOVENOR BARBOR DID ASK CONGRESS TO CHANGE THE LAW TO ALLOW THE DEDUCTION TO BE THE FAIR MARKET VALUE OF THE TIMBER, AS OF THE DATE OF THE STORM; BUT CONGRESS DID NOT PASS THAT LEGISLATION.

THE RULES ON TIMBER BASIS, AND GAIN OR LOSS ARE ALMOST IDENTICAL TO THE RULES TO INVESTING IN THE STOCK MARKET. EXAMPLE: JOHN Q TAXPAYER PURCHASES $10,000 WORTH OF ENRON STOCK IN 1997.  IN 2001, IT WAS WORTH $100,000. JOHN JUST HELD ONTO THE STOCK, WHEN ENRON WENT BANKRUPT, JOHNíS TAX LOSS WAS THE $10,000 HE PAID FOR THE STOCK, NOT THE $100,000 THAT IT WAS WORTH AT ONE TIME. SUPPOSE JOHN Q HAD BOUGHT A TRACT OF TIMBER FOR $10,000 IN 1985 AND HAD DONE NOTHING BUT WATCH IT GROW OVER THE YEARS.  IN 2005, BEFORE KATRINA HIT, THE TIMBER WAS VALUED AT $100,000.  WHAT IS HIS TAX LOSS? JOHN Q TAXPAYERS TAX LOSS IS HIS ORIGINAL COST, OR $10,000 THAT HE PAID FOR THE TRACT OF TIMBER.

LETS ASSUME THE SAME SCENARIO, IF JOHN Q HAD PASSED AWAY ON JAN. 1, 2005 AND LEFT HIS CHILD THE TIMBER, THE CHILDíS WOULD BE ENTITLED TO A NEW BASIS WHICH WOULD BE THE FAIR MARKET VALUE (FMV) AT THE DATE OF JOHN QíS DEATH.  SO THE TAX LOSS WOULD BE THE $100,000. 

NOW IF JOHN Q HAD GIFTED, OR DEEDED THE TIMBER TRACT TO HIS CHILD BEFORE HE DIED, THEN THE CHILDS BASIS WOULD BE THE SAME AS JOHN QíS, OR THE ORIGINAL COST OF $10,000.

LETíS ASSUME JANE DOE BOUGHT A HOME AND THE LAND IT WAS ON FOR $100,000, AND THERE WERE SOME WONDERFUL OLD LIVE OAK SHADE TREES ON IT.  WELL THE TREE COSTS WERE SURELY NOT FIGURED SEPARATELY WHEN SHE BOUGHT THE PROPERTY.  IN THIS EXAMPLE, JANE WILL NEED A VALUATION OF THE TREES AS OF THE DATE (OR APPROXIMATE DATE) SHE PURCHASED THE PROPERTY. WHATEVER THE VALUE OF THE TREES WAS, THAT MAY BE HER TAX LOSS.  BUT IT HAS TO BE REASONABLE, MEANING IF THE TREES APPRAISED FOR $30,000, IT MIGHT BE CONSIDERED UNREASONABLE BASED ON THE FACT SHE PAID ONLY $100,000 FOR THE HOME, LAND, EVERYTHING ON IT.  IF HER HOME APPRAISED AT $100,000 WHEN SHE BOUGHT IT & THE APPRAISER MADE NO SEPARATE MENTION OF TREE VALUE, IT COULD CERTAINLY BE ARGUED BY THE IRS THAT A $30,000 LOSS MIGHT BE EXCESSIVE.  BUT, IF THE HOUSE WAS RE-APPRAISED AFTER KATRINA, AND IT CAME TO ONLY $70,000 (ASSUMING THERE WAS NO OTHER DAMAGE), THEN THE $30,000 LOSS MAY BE JUSTIFIABLE.

CLEANUP COSTS ASSOCIATED WITH TREE OR TIMBER CLEANUP MAY BE INCLUDED IN DETERMINING THE TIMBER TAX LOSS ON JUST A FEW TREES IF THATíS THE CASE.

A FINAL THOUGHT, A TAX CASUALTY LOSS CAN NEVER BE MORE THAN THE BASIS IN THE PROPERTY. AS STATED ABOVE, BASIS IS THE KEY!

MANY PEOPLE ARE GETTING TIMBER CRUISERS, FORESTERS, AND ARBORIST TO GIVE A CERTIFIED/APPRAISED VALUE ON TIMBER AND TREES.  IN MANY CASES THAT WILL BE JUSTIFIABLE, BUT I THINK THERE WILL BE JUST AS MANY WHERE IT WILL NOT BE JUSTIFIABLE.

THERE ARE JUST TOO MANY POSSIBILITIES TO GO INTO MUCH MORE DETAIL. BUT I WILL GIVE ONE OR TWO MORE EXAMPLES I HOPE ARE HELPFUL.

IF YOU BOUGHT LAND 25+ YEARS AGO FOR $350 PER ACRE & IF TIMBER WAS ON SUBSTANTIALLY ALL OF IT, & IF YOU HAVENíT SPENT ANYMORE MONEY ON IT, THEN I DONíT THINK PAYING FOR AN APPRAISAL WILL BE WORTH IT.  IN THIS EXAMPLE, THE TAX LOSS WILL BE SOMEWHERE BETWEEN -0- AND $350/ACRE. AND USING THE WHOLE $350 COULD BE CHALLENGED UNDER AUDIT.

IF YOUíVE HAD THE LAND AS LONG AS IN #1, BUT PAID TO HAVE IT PLANTED IN TREES, MAYBE EVEN SEVERAL TIMES OVER THE YEARS, THEN THE COST OF THE PLANTING WOULD BE YOUR LOSS. AND OF COURSE ANY CLEANUP COSTS.

IF YOU PURCHASED 40 ACRES OF WOODED LAND TEN YEARS AGO, THE LOSS BEGINS WITH WHAT YOU PAID FOR THE LAND. ASSUMING THE COST WAS 2500/ACRE, THE LOSS WOULD BE EQUAL TO "WHAT WAS THE TIMBER VALUE PER ACRE TEN YEARS AGO", AND KEEP IN MIND THE LOSS CANíT EXCEED YOUR COST, OR BASIS.  TO DEDUCT THE ENTIRE 2500/ACRE MAY BE UNREASONABLE DUE TO THE FACT YOU STILL HAVE THE LAND.  YOU SHOULD GET AN EXPERT TO APPRAISE IT TO DETERMINE THE TIMBER VALUE TEN YEARS AGO WHEN YOU BOUGHT IT.  I AM NO EXPERT, BUT I WOULD THINK CLAIMING A LOSS OF 1250/ACRE WOULD BE ONE REASONABLE METHOD TO USE.  IF ONLY 20 ACRES HAD TIMBER ON IT, THAT WOULD HAVE TO BE TAKEN INTO ACCOUNT, MEANING APPROXIMATELY 50% OF THE LOSS WOULD BE DEDUCTIBLE, WHICH SHOULD BE ACCEPTABLE.

 

 jeffktax                

     

Copyright 2005, Jeff Kennedy, ATP