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Types of Sales

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.

Adjusted Basis - 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.

Before you proceed it is important to have determined the basis in the timber that was sold. Determining the basis in your assets will depend on how the assets were acquired. For a more complete explanation on what your basis is, and how to determine your basis click here.

NOTE: 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.

Filing 1099-S

Form 1099-S must be filed for both lump-sum and pay-as-cut sales (see detailed analysis). T.D. 9450 requires 1099-S reporting for lump-sum timber sales, effective for sales after May 28, 2009. IRC Sec. 6050N requires 1099-S reporting for pay-as-cut sales when the payments to the seller constitute royalty payments. Royalties are defined as payments tied to the extraction of the resource, meaning in the case of timber pay-as-cut contracts. (See IRS Announcement 90-129, I.R.B. 1990-48,10). Note that a lump-sum contract is one that definitely fixes the total amount to be paid in advance of cutting. A pay-as-cut contract is one that ties the total amount to be paid to the volume actually cut and the unit price. See also IRS Letter Rulings 9104012 (Oct. 26, 1990); 9544005 (July 14, 1995); and 9643004 (July 12, 1996).

Types of Sales

Lump-sum Sale - A lump sum sale is the outright sale of standing timber for a fixed dollar amount agreed upon in advance. The sale price is not a function of the volume cut.

Without Installment Payments - Full payment was received for the timber in the same year in which it was disposed...|continue|

With Installment Payments - You receive payments from the sale of timber after the tax year in which the disposition occurred...|continue|

Section 631 Transactions

Section 631(a) - Timber owners who cut timber for use in their own trade or business can, under certain conditions, obtain partial capital gains treatment by "electing to treat the cutting as a sale" under the provisions of Section 631(a) of the Internal Revenue Code...|continue|

Section 631(b) - A section 631(b) transaction is one in which you did not receive an up-front lump-sum for the timber but were paid for the timber as it was cut, pay-as-cut contract. A pay-as-cut contract is also referred to as a "disposal with an economic interest retained"...|continue|

Shares Contract - Under a shares contract a logger would cut the timber and sell the logs. The buyer of the logs would then write one check to the logger and another to the landowner. The proceeds from the sale are split between the landowner and the logger at an agreed upon rate prior to the sale...|continue|

Logs or Other Cut Products - As a general rule proceeds from the sale of forest products other than standing timber is treated as ordinary income. This includes logs, lumber, pulpwood, poles, mine timbers, maple syrup, nuts, bark, Christmas greens, and nursery stock...|continue|

Timberland - This section deals with the sale of timberland and any improvements that may have been made, how to calculate the gain (loss), and how to report the sale...|continue|