Tax Tips Blog

Rusty asks: I inherited some land back in the 80’s. A logger would like to harvest the trees. He is going to pay me 8,000 for the trees. How would I treat this? Capital Gain? Is it all taxable? Part of it? Thanks, Rusty

My reply:Timber sales are complex; thus it’s best to have a qualified tax professional help you with this.

In order to report your gain or loss you must first determine the type of gain or loss you have.

Standing timber is treated for income tax purposes as either a capital asset or a non-capital (ordinary) asset.

Proceeds from the sale of forest products other than standing timber are treated as ordinary income. This includes logs, lumber, pulpwood, poles, mine timbers, maple syrup, nuts, bark, Christmas greens and nursery stock.

In addition, income from the sale of firewood or pulpwood produced from the limbs and tops of trees is ordinary income.

If you are in the business of selling timber then you would report your income/loss as either one or a combination of the following:

• Ordinary Income-Form 1040 as Other Income
• Capital Gains-Schedule D, Form 1040
• Timber income incidental to Farming-use Schedule F, Form 1040 for ordinary income and Schedule D, Form 1040 for capital gains

If you are in the business of selling timber (or timber related products), then you would report your income/loss on either or both of the following:

• Ordinary Income-Schedule C, Form 1040 if sole proprietorship
• Capital Gain-Form 4797 and Schedule D, Form 1040

You should probably take a look at Form T, from the IRS website. As a matter of good business practice and record keeping, the appropriate sections of Form T such as purchases, sales, planting should be completed each year.

If you claim a deduction for depletion of timber or for depreciation related to a timber account, you must complete and attach Form T to your tax return. Form T should be filed when a taxpayer sells or cuts standing timber or has a casualty claim.

The amount of your gain or loss is determined by taking your proceeds and reducing that amount by your basis in the trees and any other related expenses. Related expenses would including marking the timber for sale (which I’m guessing you didn’t have to do), costs of inspecting the timber to determine the amount of lumber yield and paying for professional services directly related to the sale.

You stated that you inherited the land - I will assume that land included timber when inherited. If so your basis is the fair market value or special use value that was reported on the federal estate tax return. If the land was not separately stated from the timber for this valuation you may have to go back to the appraiser in order to properly divide your basis.

Your gain is determined by subtracting your basis of the timber sold and any other expenses directly related to making the sale from the proceeds you receive. If only part of your timber is sold, your cost basis must be allocated or spread against the total timber potentially for sale.

The allocation of basis is called depletion. The depletion unit is the basis amount per unit (tree, cord of wood, board feet, etc.) in your timber. Depletion is determined by dividing the adjusted basis by the available quantity of timber.

For example, if it cost you $2,500 to plant 4000 trees then the depletion unit per tree is $.625/tree; 2500 / 400 = $.625. If instead of planting you inherited the trees and the fair market value of the timber as of the date you inherited it was $10,000 and it was determined that there were 100,000 board feet of marketable timber at time of inheritance, then the depletion unit of the marketable timber at time of inheritance would be $.10 per board foot; $10,000 / 100,000 = $.10.

Three side notes:

1. You should review how your land was zoned and taxed for property taxes. If you’ve received a reduced property tax rate for forest land, you might owe yield taxes on what you harvest.

2. You should also consider protecting yourself to ensure that the logger cleans up the property to meet state forestry standards and your own desires. This may include replanting, stream restoration and slash removal. You should request that he provide a bond large enough to cover the work pending your and state forestry sign-off. If you don’t, then the state will require that you do the work.

3. Are you sure the $8,000 a fair price?

Best wishes, Gina

Chris asks:We are in the 15% bracket and own a co-op for which we pay $1,400 a month maintenance or $16,000 a year, of which 45% is tax deductible. My wife does our taxes and she informed me that last year we could not use it because we did not have enough deductions to fill in the long form. Is there any way we could use it?

My reply:

Taxpayers who own their homes, and itemize their deductions, are generally allowed to deduct their mortgage interest and real estate taxes that they pay for themselves. Most taxpayers are not allowed to deduct expenditures that others pay for them.

However, Internal Revenue Code section 216, allows shareholders to deduct a portion of their maintenance charges from their taxable income. The shareholders in a co-op are usually tenants in the co-op; thus, their maintenance charges is esentially rent paid to the co-op.

Maintenance charges usually include all costs associated with running the building, such as real estate taxes, mortgage interest, utilities, insurance, etc. Some of these expenses are not tax deductible. You are informed of the percentage of the maintenance charges that are tax deductible each year.

In order for you to claim this deduction you would have to itemize your deductions on your tax return. If you were unable to “use the long form”, then you did not report more itemized deductions than your standard deduction.

The first thing you should do is see if you (or your wife) overlooked other expenditures that are tax deductible such as state income (or sales tax) and personal property taxes, the interest on the debt you incurred to purchase your co-op shares, equity loan interest taken out on your co-op shares and charitable contributions.

Harder to qualify for, but also includible, are allowable medical expenses, casualty losses, and various miscellaneous deductions. If you think something may be deductible, but you are not sure you should ask a qualified tax professional.

The important thing to keep in mind is that your tax deduction is only a portion of every dollar that you spend. Because of this it is never wise to based your spending, business or investment decisions sole on tax consequences.

The value of every tax deduction depends largely your income — the more income you have, the more valuable the tax deduction.

Best wishes, Gina

Sharon asks:I have a Roth IRA and was considering to use it instead of my regular account for purposes of trading stocks, mind you I am not a day trader, when I refer to trading stocks, it may be after holding it a couple months to possibly a year to two. I will do that with seasonal stocks or cyclical. I have been for the most part long-term buy and hold in my Roth IRA, but figure i would be able to get a tax benefit if I traded within the Roth, is my reasoning sound? Thanks in advance for any comments. Sharon

My reply:

Without suggesting what is or is not an appropriate investment or way for you to invest (since I do not know what your total portfolio or personal financial statement looks like), I can say, that from a tax standpoint you are correct.

It is generally true that keeping investments that yield, or may yield, gains taxed as ordinary income in an IRA makes good sense. The most obvious exception that I can think of is foreign stocks, as the foreign tax that is withheld will be permanently lost.

You should also keep in mind that there are no tax benefits to losses incurred by trading in an IRA account.

And most important, it is rarely wise to change your basic investment strategy due to taxes.

Best wishes, Gina

Steve asks:I am planning to sell shares of stock that I own which are currently subject to Long-Term Capital Gain treatment, as I have held them for over a year. I’m not clear on the following things: 1) How do I qualify for LTCG of 5%, i.e., is there an income limit? 2) Is there an even lower rate (0%??) if I hold on to the stock longer, and if so, how much longer? 3) Is there an income limit for the lowest rate?

My reply:To determine at what rate your capital gains will be taxed you must first compute your taxable income.

Your taxable income (which is your income after taking into consideration all exemptions, deductions and adjustments) determines what tax bracket you will be paying tax in.

Your tax bracket determines the Long Term Capital Gains (LTCG) rate.

The 5% rate on Long Term Capital Gains (LTCG) applies to the amount of LTCG that takes you to the top of the 15% tax bracket.

The calculation of the income limit uses the same method as the current, but the brackets, exemption and standard deduction amounts change annually due to inflation. The following table outlines the Capital Gains Rates for 2007 on the sale of stock:

In 2008, the 15% Long-term rates will remain the same, but the 5% long-term rates will drop to 0%.

Then in 2011, the capital gain rates will return to the old 20% and 10% rates, and the five-year holding period rules and rates.

These rates apply to both regular and AMT calculations. The capital gains rate for collectibles was not affected by this law change and has remained at 28%.

Recaptured section 1250 gains have stayed at 25%. Since the computation involves many calculations it is wise to have a qualified tax professional help you when you prepare your return.

Best wishes, Gina

Carol asks:I am about to inherit a little over $100,000. What form do I use to report this even though it is not taxable? Can you tell me what publication covers this situation? Thanks, Carol

My response:Hello Carol!

An inheritance is a “gift” in that someone gave it to you and it is not taxable to you. There are no gift tax consequences from an inheritance that you receive from an estate.

You may find IRS Tax Topic 422 helpful.

You may get a 1041 K-1 (an estates’ version of a W-2 or 1099) if there is any income element to the inheritance. Actually, sometimes you will get a K-1 even if there is no income element to the inheritance.

Your tax advisor will know how to properly report the K-1.

Best wishes, Gina