Timber Tax - Desperate

[bernard]

Hello,

I came this board highly recommended for a situation that I have. I am filing a tax return that includes timber tax. Problem is that when doing the research I find conflicting ways of how to enter the information into a return. (Please bear with me as both my mother (86) and myself (60) have always had our taxes done and our local preparer had moved.

My mother sold timber as a pay as you cut contract. From what I can gather this classifies her in a 631( B ) IRS Code. She has had the land since 1966 when it was sold to her by my grandmother. She told 12,000 dollars worth of timber off of the land for improvements to the farm house.

I know that onthe timbertax.org website it states that a 4797 needs to be filed. If it is a gain then a Sch D also needs to be filed in addition to the 4797.

"The gain or loss from a pay-as-cut contract (disposal with an economic interest retained) is figured the same way as a lump-sum sale. The gain or loss is then reported on Form 4797, along with any other Section 1231 transactions. The gain and losses from Section 1231 transactions are netted on Form 4797 to determine if your net gain or loss. If a net gain results the amount is reported on Part II of Schedule D, Form 1040. If the netting of gains and losses from Form 4797 results in a loss it is treated as an ordinary loss and as such is deductible in the year in which it incurred up to the $3000.00 limit."

Also a question on the Sch D, The cost is listed as 12000 dollars but the basis is stumping me. Is this the basis for the same amount of wood before the cut or the basis of the entire land.

Some websites say that a Sch T (timber) form should also be filled out but for this situation, I don't think it is necessary or not required as she still owns the land. Biggest problem is I don't know all what forms to add for this. The rest of her return, I can complete but timber tax has gotten me beat.

I hope someone can shed some light as I have heard good things about the people here and on the old non-existant board.

Thanks, Bernard

[Gail in Virginia]

Hello,

I came this board highly recommended for a situation that I have. I am filing a tax return that includes timber tax. Problem is that when doing the research I find conflicting ways of how to enter the information into a return. (Please bear with me as both my mother (86) and myself (60) have always had our taxes done and our local preparer had moved.

My mother sold timber as a pay as you cut contract. From what I can gather this classifies her in a 631( B ) IRS Code. She has had the land since 1966 when it was sold to her by my grandmother. She told 12,000 dollars worth of timber off of the land for improvements to the farm house.

I know that onthe timbertax.org website it states that a 4797 needs to be filed. If it is a gain then a Sch D also needs to be filed in addition to the 4797.

"The gain or loss from a pay-as-cut contract (disposal with an economic interest retained) is figured the same way as a lump-sum sale. The gain or loss is then reported on Form 4797, along with any other Section 1231 transactions. The gain and losses from Section 1231 transactions are netted on Form 4797 to determine if your net gain or loss. If a net gain results the amount is reported on Part II of Schedule D, Form 1040. If the netting of gains and losses from Form 4797 results in a loss it is treated as an ordinary loss and as such is deductible in the year in which it incurred up to the $3000.00 limit."

Also a question on the Sch D, The cost is listed as 12000 dollars but the basis is stumping me. Is this the basis for the same amount of wood before the cut or the basis of the entire land.

Some websites say that a Sch T (timber) form should also be filled out but for this situation, I don't think it is necessary or not required as she still owns the land. Biggest problem is I don't know all what forms to add for this. The rest of her return, I can complete but timber tax has gotten me beat.

I hope someone can shed some light as I have heard good things about the people here and on the old non-existant board.

Thanks, Bernard

Bernard,

You seem to be on the right track with reporting the timber sale. The basis for determining her gain (or loss) is the amount she paid for the timber originally. If she bought the land the timber is on in 1966 for $12000, was there timber on it then and could a portion of the cost be allocated to the purchase of the standing timber at that time? If so, then that is her basis in the timber and it would reduce her basis in the land. If there was no timber of any value at the time she purchased the land, then the entire $12000 purchase price would be considered basis in the land. If she did not purchase the land, but received it as a gift from your grandmother, then her basis in the land is usually grandmother's basis in the land. This is a simplification of the basis rules, but it looks like the "cost" you are using on the 4797 is what she received for the timber if I understand your post. What she received for the timber is proceeds.

Good luck

Gail

[bernard]

Bernard,

You seem to be on the right track with reporting the timber sale. The basis for determining her gain (or loss) is the amount she paid for the timber originally. If she bought the land the timber is on in 1966 for $12000, was there timber on it then and could a portion of the cost be allocated to the purchase of the standing timber at that time? If so, then that is her basis in the timber and it would reduce her basis in the land. If there was no timber of any value at the time she purchased the land, then the entire $12000 purchase price would be considered basis in the land. If she did not purchase the land, but received it as a gift from your grandmother, then her basis in the land is usually grandmother's basis in the land. This is a simplification of the basis rules, but it looks like the "cost" you are using on the 4797 is what she received for the timber if I understand your post. What she received for the timber is proceeds.

Good luck

Gail

Thanks Gail for responding.

From what I remember as a young man that my mother had purchased the land and it did not have much timber on it at all as it was just cut in prior years by my grandfather. From what I am understanding of what you said then the basis would be 12,000. Since 1966 the timber has grown all back up and just some portions of it have been cut for improvements for the house. In 1966 the land was sold from my grandmother to my mother for the whopping sum of 1 dollar.

This is just all so confusing and almost not worth the trouble to cut the wood.

[Kea]

If your mother paid $1 for the land, her basis in the land is $1. (Since this is a nominal amount, it may still be considered a gift from your grandmother. If that is the case, her basis in the land is the amount your grandmother paid.) But if you did not sell the land, the basis is not an issue for this year's return.

If the trees were not there in 1966 and grew back naturally, then your basis in the trees is $0. If she bought small trees and planted them, the basis would be the cost of the saplings. If I am reading your post correctly, she sold the timber for $12,000 in 2006 (or the year you are working on)? If so, you would report the following for the sale of timber:

Date acquired: 1966

Date sold: 2006

Purchase price: $0 (or price of saplings)

Selling price: $12,000

Gain on sale $12,000 - long-term.

I have never done any timber sales, so I can't help with the timber tax portion.

Good luck!

[bernard]

If your mother paid $1 for the land, her basis in the land is $1. (Since this is a nominal amount, it may still be considered a gift from your grandmother. If that is the case, her basis in the land is the amount your grandmother paid.) But if you did not sell the land, the basis is not an issue for this year's return.

If the trees were not there in 1966 and grew back naturally, then your basis in the trees is $0. If she bought small trees and planted them, the basis would be the cost of the saplings. If I am reading your post correctly, she sold the timber for $12,000 in 2006 (or the year you are working on)? If so, you would report the following for the sale of timber:

Date acquired: 1966

Date sold: 2006

Purchase price: $0 (or price of saplings)

Selling price: $12,000

Gain on sale $12,000 - long-term.

I have never done any timber sales, so I can't help with the timber tax portion.

Good luck!

Thank you both for helping me out. I guess this is what I needed to hear to finish out the return. Unfortunately this is going to cost her around 900 to pay back if the basis is zero. Thanks for all the help, I do appreciate it.