Some Mississippi forest landowners with timber destroyed by the April 24 tornado may be eligible to claim a casualty loss.
Debbie Gaddis, Mississippi State University Extension Service forestry professor, said the tornado destroyed many privately owned forestlands in the state. Those owners who can claim a casualty loss will receive a deduction based on the loss of fair market value or their basis in the asset, whichever is less.
"Basis is the book value of an asset," Gaddis said. "When a forest is acquired, it has an initial basis, which is determined by how the property is acquired. For example, when timberland is inherited, an appraisal is used to determine the fair market value of timber. This value is recorded and becomes the timber basis."
"When the timber is sold, the part of the basis that applies to that sale is subtracted from the gross sales proceeds, along with sales expenses, to determine net taxable gain. It is also used to determine the amount of casualty loss that can be claimed after a catastrophic event," she said.
Different rules are used to determine the basis for timber that is inherited, given as a gift, purchased or planted as an investment.
"The initial basis is adjusted over time as timber is sold or as costs are incurred that are not recovered through tax deductions or special incentives," Gaddis said. "The current basis in timber is called an adjusted basis."
"The bottom line for casualty loss deductions of timber is that if the landowner has a basis in the timber, he may deduct the loss in fair market value of the timber or the basis, whichever is less. If that person has no basis in timber, then there is no deductible loss. If there is a basis which has not been determined, then a consulting forester may be able to determine it by a retroactive basis determination."
Gaddis said landowners who take a casualty loss deduction for timber are required to salvage the timber, if possible. If the salvage results in a gain, the gain is taxable as a long- or short-term capital gain, depending on how long the timber has been owned. Landowners can reinvest gains from a casualty loss in like-kind replacement property and avoid being taxed on the gain.
"There are very specific Internal Revenue Service regulations that must be followed to replace property," Gaddis said.
More information is available online.