According to the official dictionary of Forestry and several of my university professors (no offense intended), a basis is the set of nonzero valued decision variables in a mathematical programming solution and the values of the reduced costs and dual prices associated Blah! Blah! Blah! and on and on and on! Hopefully, you’re still with me.
Now that I have given you a taste of what I went through in college, let me give you the simplified version of what a timber basis is and why you need one.
A timber basis is the appraised value of the timber at the time it changes ownership. It is the baseline value of your timber. When you purchase or inherit property (timber, according to the IRS code, is real property) you pay the state and federal income taxes on that property, and therefore are not subject to pay income taxes on it again, if you have established an acceptable timber basis (pay attention to the operative terms). A basis allows you to offset your long-term (12 months or more) capital gain by your baseline value.
Simplified Version – it may get you out of paying taxes, again.
Example: If your timber was worth $25,000 (timber basis) the day you took ownership and five years later you sold that timber or a portion of it for $35,000 your gain is $10,000, remember you are subject to taxes on only the gain if you have an acceptable timber basis. If you are in the 15% federal capital gains tax bracket then you would only pay $1,500 in federal income taxes, with a savings of $3,750. You will have used your timber basis and it will effectively drop to zero. If you had not established an acceptable timber basis your tax burden would have been $5,250 on the entire $35,000. Remember! You already paid the income taxes on this property the day you took ownership, why pay it again?
So what do you do if you have not established a timber basis? Have one established, there’s no time like the present. Delaying establishment of a timber basis can complicate the process, so don’t wait until the last minute, as appraisals, especially discounted ones take time. The timber will have to be appraised (cruised, researched and valued) and then discounted to the year in which you took ownership. Timber basis save you money in the long-run. If you have any questions contact your local SFC representative. He can answer your questions and help get you started.