iDRY Vacuum Kilns

Sponsors:

Need advice on small timber sale - resisting the walnut fever.

Started by deezler, September 25, 2012, 01:38:55 PM

Previous topic - Next topic

0 Members and 1 Guest are viewing this topic.

Ron Scott

~Ron

Gary_C

Quote from: WDH on February 28, 2013, 08:18:16 PM
Oh you definitely will owe the IRS for taxes, that is for certain.

That's not necessarily true.

It's all about the basis you allocate to those trees. And there is nothing in the federal tax laws, tax court rulings, or opinions that prevent you from taking the entire sale proceeds, minus the costs associated with the sale and allocating part of your basis in the property, assuming it's more than the gain on the timber sale, and not have to pay any taxes. It just reduces your basis in the property by the gain on the timber sale.

So no federal taxes should be owed. But yes, you can save your basis for some future date and give the IRS some money now, but it's not necessary.  :)
Never take life seriously. Nobody gets out alive anyway.

Okrafarmer

He that dwelleth in the secret place of the most High shall abide under the shadow of the Almighty. Psalm 91:1

Operating a 2020 Woodmizer LT35 hydraulic for Upcountry Sawmill, Dacusville, SC

Now selling Logrite tools!

Writing fiction and nonfiction! Check my website.

WDH

The basis is established when the property is purchased or inherited.  At that time, the purchase price is prorated between land and timber based on their market value.  That sets the basis for the dirt, which never changes.  The basis for the timber is carried forward and adjusted as the trees grow.  Say for instance that you paid $2000 for the property and the value was equal for the land and the timber.  That would mean that the land basis is $1000 and the timber basis is $1000.  If there were 50 tons of timber on that property, then the cost basis of each ton is $20.  Lets say that it grows for 10 years and the timber volume increases to 100 tons and you cut all the timber in a timber sale.  You cost basis now is the $1000 divided by 100 tons or $10/ton.  This is called the depletion rate.  This is what you show as the timber cost when you do your taxes.

So, if you sold the timber for $3000 or $30/ton, your cost basis is $1000 or $10/ton, and the gain is $2000 or $20/ton. 

If you cut half the volume, 50 tons, then the sales price would be $1500 or $30/ton, the timber cost would be $500 or $10/ ton, and the gain is $1000 or $20/ton.  The other $500 in original cost basis stays with 50 tons that were not cut and carry forward. 
Woodmizer LT40HDD35, John Deere 2155, Kubota M5-111, Kubota L2501, Nyle L53 Dehumidification Kiln, and a passion for all things with leafs, twigs, and bark.  hamsleyhardwood.com

Gary_C

Quote from: WDH on April 01, 2013, 07:57:30 AM
The basis is established when the property is purchased or inherited.  At that time, the purchase price is prorated between land and timber based on their market value. 

That is what's called "proper accounting practice." What the IRS doesn't tell you and really doesn't want you to know is when you do a partial sale of real estate as in the sale of part of the timber on the property, you can assign anything you want as the basis of the partial sale, up to the total you have invested in the property of course. The result will be you pay no taxes now, but when or if you sell the property later, you will pay more.

And there is good reason to offset the entire sale with your basis now. If you did not, the sale could be a short term capital gain and thus would be ordinary income subject to SS and medicare taxes. And you are selling the high value timber now.
Never take life seriously. Nobody gets out alive anyway.

Claybraker

Interesting idea. On land that's passed from one generation to another, would it be possible to sell timber, decrease the cost basis in the land, then step it up when the land is passed to the next generation? It's a tax treatment I've never considered before, but I can see some advantages.

Gary_C

Quote from: Claybraker on April 01, 2013, 10:03:50 AM
Interesting idea. On land that's passed from one generation to another, would it be possible to sell timber, decrease the cost basis in the land, then step it up when the land is passed to the next generation? It's a tax treatment I've never considered before, but I can see some advantages.

It's the stepping up part that could be trouble. You cannot just "step up" the basis in the land. And most times on inherited land, your basis will be very low or nothing unless you actually purchase the land from the older generation. And that purchase cannot be just a "sham" transaction.

There could be some tax advantages of a prior purchase and using the estate tax exemption for the previous generation, but then the cash paid could be taxed when passed down. I don't know about that idea?
Never take life seriously. Nobody gets out alive anyway.

Claybraker

The estate pays taxes on the FMV of the estate at the time of death, minus the exemption. The estate doesn't pay capital gains. You're entitled to the stepped up cost basis when the asset is transferred.

This may not apply in many situations, but when my Mom inherited her land from her father, she and her sisters clear cut the property, replanted, then divided it amongst themselves. Fast forward 17 years, and we needed to do a thinning. Mom's current objectives for the property are "Banking on the Stump" and "Forest Vigor."  My siblings and I agree that Mom is pretty smart. We didn't always agree with Mom, especially when we were teens, but Mom has gotten a lot smarter over the years.

The thinning produced income, which was a taxable event. We couldn't come up with a cost basis for the income, but depleting the value of the land is something I need to discuss with our accountant.

SPIKER

Looks like some good wood taken out there.

the Forestry Forum automatically converts the KEYWORDS that are not aloud on here like "swear words" (some of the off site photo storage places) are treated just like some of the swear words pretty much & "Automatically changed to amended text telling you ya can't do that."

In SMALL sales around here many of the loggers are Amish and as such deal with cash only and wont send you 1099s etc.   
Mark
I'm looking for help all the shrinks have given up on me :o

WDH

You could not deplete the land (dirt) in a timber sale as a cost basis the way that I was taught when I was the Timberland Accounting Mgr for a large Forest products company.

In the end, I guess that you can do anything that you want to do as long as you do not get audited  ;D.
Woodmizer LT40HDD35, John Deere 2155, Kubota M5-111, Kubota L2501, Nyle L53 Dehumidification Kiln, and a passion for all things with leafs, twigs, and bark.  hamsleyhardwood.com

Claybraker

Getting audited is pretty much a given. That's why our accountant makes the big bucks.  :P

The income from the thinning wasn't a huge deal, but if there is any way to avoid paying those blood suckers more than we absolutely have to, I'm all for it.

It's an interesting idea, if the IRS will allow it.

WDH

Clay,

You need to set up a depletion account for your timber.  All costs except those that are expensible in the same year go into the account.  How long have you owned the land?
Woodmizer LT40HDD35, John Deere 2155, Kubota M5-111, Kubota L2501, Nyle L53 Dehumidification Kiln, and a passion for all things with leafs, twigs, and bark.  hamsleyhardwood.com

Norm

Gary's right as I've used that before. One reason I went that route is I can only hope that inheritance taxes or double taxation as I call it is reduced or eliminated before I die. Keep in mind that I use an attorney who's specialty is business law, tax law and she is really good.  :)

SwampDonkey

Tax laws are of course different in Canada. But on farms that are incorporated at least, there are accountants that are specialized in doing farm taxes. You can't just run down to H&R Block, they do not have the expertise. The ordinary Joe just running the woodlot as a hobby or cut once a life time do not qualify for tax benefits. There is to be a management plan and that woodlot has to be management as part of the business. Same when passing along to family, there are tax consequences if not handled properly.
"No amount of belief makes something a fact." James Randi

1 Thessalonians 5:21

2020 Polaris Ranger 570 to forward firewood, Husqvarna 555 XT Pro, Stihl FS560 clearing saw and continuously thinning my ground, on the side. Grow them trees. (((o)))

Gary_C

Quote from: Norm on April 02, 2013, 09:01:20 AM
Gary's right as I've used that before.

I knew that was right as I personally pried that little known fact from the IRS on their help line. I have used it too, but unfortunately that basis allocation fact did not help my friend as he had an idiot for an accountant that made him pay $30,000 taxes on a $80,000 sale of a home site from a farm my friend owned. My friend had more than enough basis to cover the sale but the accountant stuck with his "proper accounting practice" line and forced him to pay taxes he did not have to pay. Incidentially, after the Enron mess with their accounting firm, "proper accounting practice" is probably manditory for public traded companies to assure that stockholders are not defrauded again by accounting practices.

But on this, I am absolutely wrong.

Quote from: Gary_C on April 01, 2013, 10:25:32 AM
Quote from: Claybraker on April 01, 2013, 10:03:50 AM
Interesting idea. On land that's passed from one generation to another, would it be possible to sell timber, decrease the cost basis in the land, then step it up when the land is passed to the next generation? It's a tax treatment I've never considered before, but I can see some advantages.

It's the stepping up part that could be trouble. You cannot just "step up" the basis in the land. And most times on inherited land, your basis will be very low or nothing unless you actually purchase the land from the older generation. And that purchase cannot be just a "sham" transaction.

There could be some tax advantages of a prior purchase and using the estate tax exemption for the previous generation, but then the cash paid could be taxed when passed down. I don't know about that idea?

And for Claybreaker, you should check out this site for some very good tax information, including this page on estate planning:   timbertax.org That link is direct to the page where I discovered the real story on Stepped-Up Basis. That is an excellent site for all things timber tax related.
Never take life seriously. Nobody gets out alive anyway.

Claybraker

I like timber tax.org, but one of the problems is their info is a little dated on estate taxes. Of course, one of the problems is the rules change so much, it makes effective planning problematic at best. The good news is the current exemption is 5.25 million per spouse, a lot off us don't have to worry about it as much. Back when it was $600,000, that was an issue.

Thank You Sponsors!