Determine Your Basis
What is my basis? - The original basis of property is usually its cost, along with any other expenditures incurred to acquire the property. The cost is the amount you pay in cash, debt obligations, or in other property.
The basis is used to calculate the depletion unit needed to determine the taxable gain (loss) when you sell timber on the stump, cut timber, or dispose of it involuntarily, such as by a casualty, theft, or condemnation.
How do I determine my basis? - There are different methods that can be used to determine your basis. The method recommended by the IRS is based on the proportion of the total fair market value of the property represented by the fair market values of each of the individual assets. The fair market value (FMV) of an asset is the price at which that asset would change hands between a willing buyer and seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of all the relevant facts. The best indicator of the fair market value of an asset would be sales of similar property (comparables) on or about the valuation date.
The procedure to allocate the available basis between assets is the same no matter "when" the property was acquired, however, the total basis available for allocation will depend on "how" the property was acquired. You cannot determine your basis in some assets by cost.
How do I determine my basis if the property was:
Are there alternative methods of determining basis? - The residual method is sometimes used when only land and timber are acquired. A reasonable market value for the bare land is subtracted from the total purchase price and the residual amount is allocated to the timber. The allocation of the timber and bare land can also be stated in the purchase contract by separately listing the purchase price of the timber and the land.
How do I determine my basis if I have owned the property for years but never established a basis when I acquired the property? - The procedure for determining your basis sometime after the property was acquired is the same as doing it when the property was first acquired. However, certain information will be required that may take some research if proper records of your timber transactions were not maintained.
You are required to estimate, with respect to each separate timber account established, the total units (bd. ft. measure, log scale, cords, or other units) of timber reasonably known, or on good evidence believed, to have existed on the ground on the date of acquisition. If cutting has occurred the volume removed must be figured into the original volume. In essence you are growing the forest in reverse to the date of acquisition.
Once the volume by type has been established the fair market value of the timber on the date of acquisition must be determined. The best available evidence of timber values on this date must be used. The price actually paid for timber similar in character and quality in the location of the subject property on or near the valuation date can be used. Such information can usually be obtained from consulting foresters or timber buyers. Published price reports may be used if the average prices are adjusted to reflect differences for the timber quality. If timber has been disposed of since the acquisition the basis must be reduced by the basis allowed for any previous sales or other disposals.
How do I adjust my basis? - The original basis of an asset will change as capital improvements, carrying charges, or other additions are made to the asset, or as allowances for depletion, amortization, or depreciation are deducted. The amount remaining in any account after changes have been made is the adjusted basis.