NOTE: For the most recent developments on casualty losses due to the hurricanes click here!
Tax Treatment of Timber and Shade Tree Casualty Losses
The tax treatment of losses to timber and shade trees resulting from acts beyond the control of the owner is considered unfair by most timber owners. Timber is treated in the same manner as other assets. No special consideration is made for the fact that timber is an uninsurable appreciating asset with a very low basis to most owners. After almost every major catastrophe, such as hurricane Hugo, the Congressional delegations from the suffering states introduce legislation to allow a casualty loss deduction based on the fair market value of the timber destroyed. Although these bills "play well to the folks back home" they have never received serious consideration even at committee level. Apparently Congress believes that the federal disaster relief programs are adequate.
Definition of a Casualty
A casualty loss is an actual loss of tangible or measurable property which is "evidenced" by a closed and completed transaction, fixed by identifiable events," and actually sustained during the taxable year. For a casualty loss to occur the event causing the casualty must be a natural or other external force acting in a sudden, unexpected, or unusual manner. This means that losses due to tornadoes, hurricanes, wild fires, etc. are deductible, but losses due to disease or insect infestations generally are not.
Basic Rule for Casualty Losses
The amount of the deductible loss is the lesser of -
1. The decrease in the fair market value of "single identifiable property (SIP),"
2. The adjusted basis of the "single identifiable property,"
any insurance proceeds, salvage value or other compensation received.
NOTE: A recent Revenue Ruling, Rev. Rul. 99-56, has expanded the meaning of the "single identifiable property." Under the new ruling "single identifiable property" (SIP) means either the individual units of timber (cords, board feet, etc.), or the entire block of timber affected by the casualty event. Block refers to all the timber in a given timber account. In addition, the new ruling allows you to include not only the timber destroyed, but timber that was damaged by the casualty event when calculating the lesser of the change in FMV or adjusted basis. The decision on how you identify the SIP is up to you, and should be clearly reflected in your timber records. It is unlikely the IRS will approve combining or subdividing your merchantable timber accounts after the casualty event simply to maximize your tax position. You should look at which method will provide the greatest recovery of losses before deciding.
Definition of "the Single Identifiable Property"
How the Single Identifiable Property is defined differs depending on the type of property and how it is used.
1. Property held for personal use:
a. Real property - All improvements, such as buildings and ornamental trees are treated as one unit and a single casualty loss is determined for the entire unit.
b. Personal property - Loss is calculated for each individual item, for example, each piece of furniture in your home.
c. Both real and personal property - Loss is calculated separately for each class of property.
For property held for "personal use" the loss is limited to the amount by which each adjusted loss exceeds $100. In addition, the total loss deduction for any one year is limited to the amount by which the total of all losses exceed 10% of adjusted gross income.
Technical Note: The $100 limit applies to each casualty , that is, each event. Thus, if your home was subjected to a fire one day, and a tornado the next, and the events were not related, there would be a $100 limit for each event.
2. Property held for production of income as business or investment:
The loss is determined separately for each item of property. Thus, if the ornamental trees around a commercial building were destroyed, the loss would be limited to the lesser of the decrease in the fair market value of the trees, or basis of the trees destroyed. For Timber the "single identifiable property" (SIP) is either (1) the individual units of timber -- cords, board feet, etc., or (2) the block of timber.
To learn more about "Timber Casualty Losses" click here.
To learn more about casualty losses to "Shade Trees" click here.
To learn more about "non-casualty losses" click here.