Gain or Loss
Basic Rule - The gain or loss on the sale or other disposal of timber is determined by reducing the amount received for the timber by the cost or other basis of the timber and any expenses incurred in making the sale or other disposal.
Net Gain (loss) = sale proceeds - cost or allowable basis - sale expenses
Sale expenses could include those for a consulting forester, lawyer, survey of the property etc. The cost basis is the amount that has been allocated to your merchantable timber account using the capital asset allocation procedure. The only instance in which the sale proceeds would be reduced by the entire cost basis or adjusted basis would be if all the merchantable timber was sold at one time. This would reduce your basis in that account to zero. If only a portion of the merchantable timber is sold it will be necessary to calculate your allowable basis. This is done by multiplying the volume sold by the depletion unit.
Depletion Unit - Your depletion unit is the cost per unit of volume. It is determined by dividing the cost basis or adjusted basis of the timber by the total volume of timber on the tract of land represented by the account. It is very important that you adjust your timber accounts, both volume and value, before you determine your depletion unit for a sale.
Reasons for adjusting your basis would include any costs that had been capitalized to the account, or if you had previously recovered a portion of your basis. The volume account would change if any additional timber was purchased, transfers from young growth or plantation accounts to the merchantable account, volume gained through growth from your last adjustment, or volume removed through a sale or other disposal or lost due to natural causes. The easiest way to obtain an updated estimate of your timber volume is to have the forester helping you with the sale determine the total volume of merchantable timber in addition to marking the timber for the sale.
If you have additional purchases that are being treated as a separate tract of land this will not have any affect on your basis or volume of existing tracts. In that instance separate accounts should be maintained for the new tracts and depletion units calculated for those tracts. No depletion allowance can be claimed for timber you cut for your personal use such as firewood for your home.