Sometimes individual investors find themselves in the natural resources business when they purchase a principal residence or vacation property with harvestable hardwood timber on it. If a property has valuable walnut, cherry, or similar trees, it is often advisable to harvest it yourself before you discover that someone else took your trees during the middle of the night.
Before you pat yourself on the back for collecting a nice sales price, you also need to think about how to reduce the taxes you will owe.
The way you reduce your taxes is by claiming a depletion deduction. To do this, you are going to need an estimate of the total timber board feet that you purchased with the property.
You also need to determine your adjusted cost basis in your property. See our page for Personal Residence for help with this part. Your adjusted cost basis will be the amount you then allocate between your home, the land, and the timber based on their relative fair market values. The timber portion will then be available to you for depletion deductions.
Information provided is intended solely for cash-basis U.S. citizen individual taxpayers and is believed to be accurate for most cases but is not guaranteed. Always consult your personal tax advisor about your own situation. Suggestions are most welcome. Please email costbasis@gmail.com with your comments. If this website has been helpful to you, please consider making a donation to support our efforts.
