TIMBER LOGS

[TAXMAN]

Hey ya'll : Dad died 2012. Daughter inherits all property. Real estate appraisals were done for Estate purposes.(no mention of timber). Daughter sells logs in 2015. Do you think maybe 30 to 40% of what sold for in 2015 would be a safe bet? The way it was done, said I will give you 14k for the walnut that I can get. She said ok. Buyer paid her. End of deal. No measurements or any idea of how he came to that price. What do you think?

[Lee B]

First you need to know how many board feet were sold.

Second you need a logical valuation as of 2012 once you known the board feet.

Without a quantity and a value, you're whistling in the dark with a zero basis.

 

[rfassett]

If there was no valuation done for the timber, you are likely out of luck.  And like cbslee said, you will have a sale of $14,000 with no cost basis.  The good news is it would all be long term capital gain.

[Edsel]

Setting a value of the timber is a sophisticated process.  The board feet mentioned by cbslee are necessary because you need to measure what was available versus what was cut.  Calculation of board feet as lumber is irrelevant because calculation of board feet as logs is 10-15% less because of what the sawmill figures they will lose in bark, knots, and irregularities in shape.  Walnut is more expensive than most other wood species - up to 4X as valuable as pine.  Today walnut is worth more than red oak, 15 years ago the reverse was true.  Also, typically a landowner is paid 50% as much as what the logger can sell to a sawmill.  This percentage drops as the contour of the land becomes extreme and difficult to transport the logs away.

Real estate appraisers know the timber is there, but they are not necessarily qualified to assess it, so it is often ignored.  Other complicating factors:  over time, timber grows and creates more board feet than in younger years - but this is deceptive if the timber was mature and if so it reaches a point of maximum value and then begins to deteriorate.  Timber is something that if you don't value it at the critical point in history, you lose the opportunity forever to have an accurate appraisal.

Another difficulty is that timberland (forested land) is not worth more than pastureland just because it contains harvestable logs.  Cattle cannot graze in forested land, nor can any row crops be raised.

[Evan S. Golar]

Maybe this Audit Technique Guide can help you find what you need:

http://www.unclefed.com/SurviveIRS/MSSP/hardwd.pdf#xml=http://search.atomz.com/search/pdfhelper.tk?sp_o=4,100000,0

[Lion EA]

https://timbertax.org/

 

[Abby Normal]

Edsel is the the official timber expert on this forum.

[Catherine]

Thank you, @Edsel, for your fabulous exposition on timber issues!

[DANRVAN]

8 hours ago, TAXMAN said:

 No measurements or any idea of how he came to that price. What do you think?

Even thought you do not have exact measurements or values,  I believe you can still make a reasonable estimate of the basis which the tax courts would allow under the Cohan Rule.

First of all, we can assume that timber the was sold at FMV or less (most likely less which will make the estimate conservative).

You need to determine three things: (1) price per mfb on date of death,  (2)price per mfb date of sale, and  (3) growth rate of the timber. 

For example assume the following (1)$300, (2) $250, and (3) 5%. (I am not familiar with walnut but would pick a growth rate on the high side to be conservative.)

Estimated volume sold = $14,000 / $300 = 47 mfb (rounded).

Working backwards with 5% growth rate estimated volume of the timber sold was 40 mbf  on date if death.

Estimated basis of timber = 40mfb * $250 = $10,000.

Now you need to reduce the basis of the land by $10,000. 

Hope this helps!

 

 

 

[DANRVAN]

6 hours ago, Edsel said:

you need to measure what was available versus what was cut. 

Timber is something that if you don't value it at the critical point in history, you lose the opportunity forever to have an accurate appraisal.

 Cattle cannot graze in forested land,

Sorry but I have to disagree with those three statements.

The amount available to cut is not a factor.

I have used standard growth rates and historical timber prices to determine basis in many situations, often with expertise of a professional forester.

In the western united states,  timber land is used for summer livestock grazing.

[Edsel]

5 hours ago, Abby Normal said:

Edsel is the the official timber expert on this forum.

Abnormal, thanks.  I'm not really that bright, but I worked in a sawmill 30 years ago.  I'm not familiar at all with western timber.

[DANRVAN]

As a foot note to my above post, the client is ultimately responsible for the estimate, that needs to be communicated and documented.

Several years ago I had a new client who had sold some timber on his ranch.  Previous CPA had deducted a generous basis from timber sold on a prior tax return, so I asked for calculation of his basis.

Turns out prior CPA must have looked up to the ceiling and pulled out a number.  The ranch had been gifted through  multiple generations for over a century so basis was basically zero.