Shade Trees

"Shade trees" refers to trees valued primarily for their in-place aesthetic beauty. In general shade trees are associated with property held for personal use, such as a residence. As such, "the property" for which the loss is determined is the property as a whole. The basis of the house and landscaping is compared to the decline in the fair market value of the property as a whole. The lesser of these two values is the deductible loss. Because the entire basis of the property applies, the change in fair market value is usually smaller than the basis.

A separate appraisal of the shade trees themselves and estimates of their replacement cost can be used as appraisal factors, but the actual sales prices for properties comparable to the damaged property are the only evidence the IRS will accept at more or less face value. Since sales prices for similar properties with and without shade trees aren't readily available in most rural areas, shade tree appraisal and replacement cost are frequently used as the primary appraisal method.

Valuation Methods.Shade trees should be valued by a qualified appraiser. The standard appraisal method is presented in Valuation of Landscape Trees, Shrubs, and Other Plants. The Journal of Arboriculture should be consulted for additional information on appraisal methods.

Timber and Shade Trees on Same Property - Many woodland owners live on their property. The house is frequently placed in a wooded setting. The trees within the homesite constitute shade trees while those outside the homesite constitute timber. The question of where the shade trees end and the timber begins is a judgment call. The best judge is a qualified appraiser. However, the homesite is generally the area taken care of as part of the yard. Taxpayers in this situation should become familiar with the court case Bowers vs. Commissioner [42 T.C.M. 1659, Tax Ct. Mem. Dec. (CCH) 38, 422(M), (P-H) 81,658 (1981)].

Clean up costs not determining - The costs of restoring and cleaning up the property after a casualty loss may be used to determine the decrease in fair market value if the following conditions are satisfied:

  1. Cost were necessary to restore the property to its pre-casualty condition;
  2. Amount spent for restoration is not excessive;
  3. Costs do not do more than take care of the damage suffered;
  4. Value of the property after restoration is not more than its value before the casualty.

Business Use - Shade trees also are an important landscape component of many industrial and other business sites. In such cases the loss is determined by applying the rules to the individual tree, not the property as a whole.

Claiming a Shade Tree Casualty Loss

A casualty loss to shade trees associated with property held for personal use is reported on Form 4684, Section A. The amount by which the loss exceeds any insurance payments received is reduced by $100 and is further limited to the amount by which the loss exceeds 10 percent of adjusted gross income. The remaining amount is carried over to Form 1040, Schedule A, line 18, as an itemized deduction.

If the insurance payments received exceed your basis in the property the gain is reported on Schedule D, Form 1040, as a capital gain. This gain is netted against any capital losses. If a gain results it is taxed at your ordinary income tax rate.

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).