Basis for capital gains tax

   / Basis for capital gains tax #1  

DrRod

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Apr 25, 2005
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Location
Ellicott City, MD - Farm in Orbisonia PA (south ce
Tractor
John Deere 4110
We cut about nine acres of pine timber last year and now need to address the tax side of it. It is clearly eligible for capital gains treatment but we don't know was the basis should be. We inherited the land and the last time any money changed hands for the property was around 1850. Anyone have any experience with a situation like this or even some unfounded advice? All thoughts appreciated.
 
   / Basis for capital gains tax #2  
DrRod - yes, 36 years ago we sold our house in Anchorage and had to use the profits to build a house here in Cheney of equal or greater value or pay capital gains tax on the unused amount.

AND - believe me - that is ALL I know about capital gains tax and that knowledge is 35 years old.

So - JMHO - seek the advice of a trusted Certified Public Accountant. We were, and still are, beyond fortunate - there is an exceptional CPA here in Cheney. On the original capital gains - she save us many, many thousands of dollars with her advice.

She has done all my tax work since that very first year - by now, a trusted old friend.
 
   / Basis for capital gains tax
  • Thread Starter
#3  
Thanks. My accountant and some others I've talked with all seem stuck coloring within the lines -- i.e. "well you are just going to have to set a basis for us to start with." Therein lies the problem -- there is no basis.
 
   / Basis for capital gains tax #4  
Read this publication:
https://www.fs.fed.us/spf/coop/library/taxpubfaqs.pdf

Especially page 12.
The basis of inherited timber is the fair
market value of the timber on the date of
the decedent’s death

When you inherited the property, you should have had it appraised to determine whether you owed estate tax. In most places, in order to get title to the land transferred the probate court has to approve the transfer, and the heirs have to show that any estate taxes have been paid. That appraisal should have separated the value of the timber and the land.

If not, you need to figure out what the value of the timber -- not the land -- was on the day you inherited it. Take the current value. Get someone who estimates timber for a living to estimate how much it increased in value per year since the inheritance. Then get what the price of lumber was back then compared to today. That's your basis.

Unless you're talking a huge amount of money, capital gains rates are so low that it might be worth saving the hassle and claiming zero basis.
 
   / Basis for capital gains tax #5  
Read this publication:
https://www.fs.fed.us/spf/coop/library/taxpubfaqs.pdf

Especially page 12.


When you inherited the property, you should have had it appraised to determine whether you owed estate tax. In most places, in order to get title to the land transferred the probate court has to approve the transfer, and the heirs have to show that any estate taxes have been paid. That appraisal should have separated the value of the timber and the land.

If not, you need to figure out what the value of the timber -- not the land -- was on the day you inherited it. Take the current value. Get someone who estimates timber for a living to estimate how much it increased in value per year since the inheritance. Then get what the price of lumber was back then compared to today. That's your basis.

Unless you're talking a huge amount of money, capital gains rates are so low that it might be worth saving the hassle and claiming zero basis.

Being a retired CPA, I concur with this statement. Well stated.
 
   / Basis for capital gains tax #6  
I would highlight one element to basis. As the property has passed down from generation to generation, if it were passed while the giver was alive, the givers basis passes along. If it passes after death of the giver, then the basis is reset to market. This could be a significant difference.
 
   / Basis for capital gains tax #7  
The basis for any inherited property is the value on the date of death. I would bet there is a formula. Ie value today when sold was $x. It grows 8% a year or whatever. So you can back your way into the basis.

This is likely a VERY common problem. You just need a cpa versed in forestry.
 
   / Basis for capital gains tax #8  
In WA state timber is not part of the land value, being a commodity it is considered for tax purposes as appreciable personal property. I logged off $100K in timber value and had to pay state excise (sales) tax and capital gain tax on the net proceeds.

I owned the land + house for 7 years and sold it at land/improvements value, timber was not part of the deal. How the seller when I bought it handled the timber I have no clue as it was not addressed in the sale documents (realtor screw up). It was easy as we took the timber value on the year purchase value if sold, and calculated it from that. So, even the so called professional along the line were clueless or ignored the tax considerations. I have since learned that as an appreciable asset any cost to grow/maintain the value is also deductible against the capital gain.

Ron
 
   / Basis for capital gains tax #9  
Your basis in the property is the value it was when you inherited it unless it was a gift. If it was a gift, a bunch of other rules apply. It an appraisal was not done and it was inherited, the IRS would probably accept the county's assessed value at the date of death unless you can come up with something better. I do believe you can take a depletion allowance for harvested timber which would reduce your basis by the amount of the sale and not trigger capital gains reporting in the year of sale. Rather, you would pay the tax when you sell the property (and have a greater gain on sale). However, if your basis is reduced below zero, it probably would trigger reporting by the amount less than zero. Gary, would you agree?
 
   / Basis for capital gains tax #10  
Your basis in the property is the value it was when you inherited it unless it was a gift. If it was a gift, a bunch of other rules apply. It an appraisal was not done and it was inherited, the IRS would probably accept the county's assessed value at the date of death unless you can come up with something better. I do believe you can take a depletion allowance for harvested timber which would reduce your basis by the amount of the sale and not trigger capital gains reporting in the year of sale. Rather, you would pay the tax when you sell the property (and have a greater gain on sale). However, if your basis is reduced below zero, it probably would trigger reporting by the amount less than zero. Gary, would you agree?

I wouldn’t fully concur. Remember the first simple rule, cash receipt equal taxable event, therefore you will have a tax event in the year of the cash receipt, no way of deferring the event. The question would be, how much taxable gain? That would be determined on adjusted basis and other cost incurred to produce the gain. If you have spent money in prior years to raise your timber, now is the time to add that to the cost or the basis of the timber sold.
It sounds like it could be a bit tricky on determining basis due to how it has been passed down. I wouldn’t get wrapped around the axel on it though, just be prudent.
 

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