Caualty Loss

Casualty Loss Deductions For Timber

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Forest landowners whose timber has been destroyed may be eligible to take a deduction for the loss on their federal income tax. The loss must be physical in nature and caused by an identifiable event or combination of events that has run its course. There are two types of losses from natural events.

Casualty losses are sudden, unexpected and unusual - as from a fire, tornado, storm or hurricane. Non-casualty losses are not sudden but are unexpected and unusual –as from a severe insect attack, drought or disease. Casualty and non-casualty loss deductions are available to all owners who hold timber to produce income, whether as a business or an investment.

Allowed Deduction Losses may be deducted up to the adjusted basis of the timber lost. Basis is the cost of the timber on the property. It is either the cost allocated to the timber when the tract was purchased, or the fair market value of the timber when the property was inherited, or the cost of reforestation when the tract was planted by the current owner. For casualty loss purposes, the IRS lets you use the basis of the “single identifiable property”, which can be the number of board feet of timber, or the basis for all timber on a tract, or the basis for all timber owned by the landowner.

Measuring Loss A deduction is allowed only if the damage renders the timber unfit for use, or results in it being sold for less value than it was appraised for prior to the storm. Claim as a loss the difference between the adjusted basis for the tract and the amount received from salvage, if the latter is less than basis. Reimbursements from insurance and other anticipated recovery must be deducted in computing the loss. In other words, Basis less salvage less insurance equals casualty loss.

EXAMPLE 1: You own 50 acres of forestland carrying 200 MBF of young sawtimber. Your adjusted basis in the timber is $4000. A natural disaster damages 10 acres, destroying 25 MBF of timber, which was worth $6500 before the storm. You have no timber insurance and could not salvage. Your casualty loss deduction can be either the basis of the damaged tract (10/50 of $4000 or $800) or of the entire property ($4000), even though the timber was worth $6500.
EXAMPLE 2: The same as above, but you are able to salvage the stand as pulpwood getting $1,000 in stumpage. Your loss is the difference between the value before and after ($6500 - $1000 = $5500) or the basis, whichever is less. In this case, the $4000 basis would be used.

Involuntary Conversion Income If the salvage income is larger than the basis, the income is considered an “involuntary conversion.” This income is considered capital gains and may be taxable. But if the salvage income is reinvested within 2 years into reforestation or the purchase of new timberland, the taxes owed are deferred until the new timber is sold.

EXAMPLE 3: You own 20 acres of natural regenerated pines, which had no basis. You were able to get the timber sold and got $2000 in salvage value. The casualty loss would be the basis ($0). The timber salvage would be considered a $2,000 involuntary conversion capital gain. If you use that $2000 to site prepare and replant your trees, you will pay no taxes and the basis of the new stand will stay at $0. If you spend more than $2000 to replant, the basis will be the total cost less $2000. If you spend less than $2000, you will owe capital gains tax on the difference.

Document the Casualty Regardless of the use or intent for owning the property, it is necessary to document or show the type of casualty and when it occurred, and that you owned the property at the time of the damage. Photography is a very good way to document losses, and "before and after" shots are especially useful in assisting appraisers with determination of fair market values. Keep newspaper clippings showing the existence of the disaster.

How to File Deduct a loss on your tax return for the year the loss occurs. Use Form 4684, Section B, to report either a casualty or non-casualty loss.

Amended Returns Casualty losses occurring from an event in an area declared eligible for federal assistance under the Disaster Relief and Emergency Assistance Act may be deducted on the return or amended return for the tax year immediately preceding the tax year in which the disaster happened, as well as during the tax year in which the event occurred. For a disaster occurring in 2011, one would have until April 15, 2012, to file an amended return for deducting losses on the 2010 tax year return.

Additional Resources:

For additional information on these and other tax matters, consultation with a certified public accountant or tax attorney is recommended. Timber tax information is also available at http://www.timbertax.org/ .