Sold Trees on Personal Residence - Basis?

[Hamacher]

I have a client that sold several trees (approx. $30,000) that were in the woods behind her house. Is ALL the income taxable or can she reduce the basis in her house by that amount? If she has to report gain, would it be capital or ordinary income?

Thanks in advance.

Steve

[Zee]

How much property is included with the home (acres)? $30000 is a lot of trees, no?

[ChEAr$]

My question would be:

How much property is included with the home (acres)? $30000 is a lot of trees, no?

Does client have an appraisal of property showing basis in trees when property was
bought way back when/

[Zee]

The basis won't be easy, sale is capital gain

Here's some links that might help you. It might be worth the expense of hiring a timber appraisal specialist to help with the calculations. This is an interesting question, that must happen often. I hope others reply.

The first link an IRS link on the determination of a timber sale as a capital gain (page 19):

http://www.irs.gov/pub/irs-pdf/p544.pdf

or, http://www.irs.gov/publications/p544/ch02.html#d0e3943

This is a link to a discussion on the handling of timber sales:

http://www.mobar.org/journal/2001/janfeb/schneider.htm

The last link is a discussion on basis calculation. It focuses, however, mostly on the purchase of timber property not a personal residence with additional acreage and timber.

http://forest.wisc.edu/extension/Publications/71.pdf

I do hope these help. The determination of basis won't be easy.

[SunTaxMan]

Wrong link?

Zee,

The first two links are the same and neither is IRS.

[Gene V]

You might also read page 52 in Pub. 225 Farmer's tax guide

[Zee]

Zee,

The first two links are the same and neither is IRS.

Thanks, I changed it to a link to Publication 544 (same information)

[Hamacher]

Thanks!

Thanks everyone for your input. I think it does qualify for capital gain treatment. Now I just need to figure out how much to use for the basis. She owns 70 acres and decided to sell the trees outright. I just had one thought... her Husband passed away in 2006. She inherited the entire Farm, so half of the sale should be given a step up in basis. Correct? Then I just need to determine her basis in her half. Any thoughts?


Regards,

Steve

[cpadan]

She gets step up basis for ½ of the trees. You need to find the market value (see http://www.srs.fs.usda.gov/econ/data/prices/ ) on date of death and multiply by ½ of the volume sold. Since only a year has passed, you need not consider the growth of the trees.

The rest of the basis would depend on when and how they acquired the property. There are growth rate tables you can use to work back and determine what percent of the harvested timber was standing when they acquired the property. For example see http://aede.osu.edu/class/aede531/so...ca_for_ans.htm

There is no basis in respect to the growth that occurred after the property was acquired. I know accountants that use another approach, commonly called a wild guess. Of course you need to consider how much time and effort this is worth to your client.


Good luck
Dan