Do you know the term "basis"?

If you own forestland, you need to become familiar with BASIS. What is basis and why is it important? Simply put, knowing about basis and acting upon that knowledge may save you thousands of dollars in income taxes paid. How? When you file income taxes on income derived from a timber sale, your taxable income is determined by subtracting your "basis" from the timber sale income. You then pay taxes on that amount (not counting any deductions to which you are otherwise entitled).

Basis must be established with your financial record keeping practices. There are several different ways to establish basis and how you determine basis is dependent upon how you acquired the property. Basis for inherited property is determined differently than if you purchase the property or it is deeded to you.

If you purchase property, your basis is the total acquisition cost of the property and the basis must be divided among the land and the timber. If the property is inherited, the basis is the fair market value at the time of death, as determined by an appraisal by a registered forester. If the property was deeded over or gifted, the determination of basis is different and a little more complex.

In summary, basis needs to be established before selling timber. If there is no basis, the difference in taxable income can be staggering. Not everyone has basis in their timber, but if you do, it will save you in taxes owed on a timber sale. In many cases, a consulting forester can help determine basis retroactively, as allowed by the IRS.

For more information on this topic, please visit your local Extension Office and ask for Publication 1983, from the Forestry Income Tax Series, I. The Basics of Basis, by Dr. Stephen G. Dicke and Dr. Deborah A. Gaddis, MSU Extension Forestry Specialists. You may also find the publication online.