Wow! It finally happened! You are now the proud owner of some woodland acres or timberland. Like most new owners, you cannot wait to enjoy the property. Therefore, you pull on your boots and head for the woods. This is what all too often happens when a new owner takes title to forestland. However, you should place the joys of ownership on hold for one very important determination. A new owner should first determine the original basis, or value, of all merchantable and unmerchantable timber at the time of acquisition. Before explaining the basis in detail, let's quickly see why it’s so important. If you conduct a timber sale and receive income, your basis, for that portion of your timber sold, is deducted from the sale income before computing income tax. Since knowing your basis can reduce your tax bill, it’s very important to make the necessary calculations when you acquire woodland property! For example, I recently thinned some timber on my property. I earned $15,553 from the thinning but ONLY had $2,787 in capital gains! Quite a Savings!!
Merchantable timber is simply determined by cruising the timber and assigning Fair Market Value by a Registered Forester. Unmerchantable timber is a bit more complicated but is generally determined by a formula or discounting an anticipated cash flow aka Present Net Value.
Subtract the cost of the timber from the total purchase price and assign that value to the bare land.
Purchase Price = Timber Value + Bareland Value (Land Expectation Value)
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