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Non-Casualty Losses

Business Losses:

Under certain circumstances losses incurred to property used in a trade or business are deductible even though not resulting from a casualty. To be deductible the loss must result from an "abnormal" event. To be considered abnormal is must be unusual and unexpected. The event doesn't need to be sudden as required for a casualty loss.

Death of Seedlings Due to Drought - The abnormal death of seedlings due to drought may result in a non-casualty business loss (Rev. Rul 90-61). The deduction is limited to the cost basis of the seedlings on the acreage that must be replanted due to the unusual and unexpected drought. The costs incurred to replant the affected acreage are capitalized to the plantation account or the reforestation amortization account. The loss is reported as a Code Section 1231 involuntary conversion on Form 4797. The netting requirements of Section 1231 determine whether the loss will be a capital or an ordinary loss.

Death of Timber Due to an Insect Attack - Some level of timber tree mortality due to insects is normal. However, mortality due to insects may reach abnormal levels due to unusual and unexpected infestations of insects such as the southern pine bark beetle. If unusual and unexpected the resulting loss may be deductible as a non-casualty business loss (Rev. Rul. 87-59). The amount of the loss is determined in the manner described for casualty losses and is reported as an involuntary conversion.

Theft Losses

The deductible loss for timber theft is determined in the same manner as for casualty losses. However, theft losses are deducted in the year the theft is discovered. It is not necessary to prove when the theft occurred.

Condemnations

A condemnation is the taking of private property for public use with out consent of the owner but with award and payment of just compensation. The tax consequences are the same whether you sell the property under the threat of condemnation or the property is actually condemned and an award granted by court order.

The manner in which the timber loss is determined depends upon whether or not the owner is allowed to sell the timber before the condemning party takes control. If the timber is sold, the basis is determined as for any other timber sale and the gain (loss) is reported as an involuntary conversion, Section 1231 transaction, on Form 4797.

Treatment of Gains From Involuntary Conversions:

The gain on an involuntary conversion should be reported as income for the year in which it is received. You may qualify to postpone recognition of the gain buying replacement property. An involuntary gain is realized when the insurance, award, or other compensation received for property involuntarily converted is greater than the basis of the property.

For additional information please refer to IRS Publication 547 (Sales and Other Dispositions of Assets) and 549 (Casualties, Disasters, and Thefts).