Chapter 4 - Basis in Gifts and Inherited Property - Hardwood Timber Industry
The basic rule for gifts is that if the FMV of the gift is less than the donor's basis, then the basis for depreciation, depletion or amortization and for gain on its sale or other disposition is the same as the donor's adjusted basis in the asset (IRC section 1015(a)). The basis for loss for such property is its FMV at the time of the gift. If, however, the FMV of the gift is greater than the donor's adjusted basis at the time of the gift, then the basis for depreciation, depletion, or amortization and for gain or loss on its sale or other disposition is the same as the donor's adjusted basis in the asset, increased by the amount of any gift tax paid on the gift. But this total cannot exceed the FMV at the time of the gift.
The basis in inherited property is usually its FMV on the date of death of the person granting the property (IRC section 1014(a)) . If the decedent's estate has elected to value the property under IRC section 2032A, then the value is determined under this section. If a federal estate tax return was filed, and if the property had to be included in the gross estate, the FMV for estate tax purposes should be used. If a federal estate tax return did not have to be filed, the appraised value on the date of death reported on the state tax form for inheritance or transmission taxes should be used.
If timber is not listed separately on the federal estate tax return or state tax form, you will need to make an allocation to timber. For example, the timber and timberland may have been valued together. The allocation procedure demonstrated in Example 1 would be used, but the value reported on the estate tax return will be used instead of the acquisition cost.