Tornadoes and other severe storms have always been a risk to timber ownership. Unfortunately, there is no affordable insurance program for timberland owners of less than 100,000 acres. So, when timber damage occurs, owners are often left with three options; do nothing, salvage the timber, or take a loss.
As much as we hate to see timber go to waste, in many cases, there isn’t enough damaged timber to justify a salvage operation. If that’s the case, is there any mechanism to lessen the financial blow from lost timber? Fortunately, there is. Kingwood has performed numerous timber damage appraisals for clients. These damage appraisals are used by accountants to compute a loss on federal taxes.
Here is what CPA Belinda Baker with Grier Reeves and Lawley, PC in Texarkana tells us about timber loss: “Casualty loss amounts are the lesser of the adjusted basis of the property or the decrease in Fair Market Value (FMV) comparing before and after the event.
Example: XYZ Company owns timberland with a $30,000 adjusted basis in timber. The property is struck by a tornado leaving much of the timber severely damaged. XYZ Company is reimbursed $4,000 from their insurance provider. Kingwood assesses that the FMV of the timber has dropped from $70,000 before the tornado to $50,000 afterwards for a $20,000 decrease in FMV.
| 1. Adjusted Basis Prior to Tornado | $30,000 |
| 2. Decrease in Fair Market Value | $20,000 |
| 3. Amount of Loss (Lesser o fLine 1 or 2) | $20,000 |
| 4. Less Insurance Reimbursement | $0 |
| 5. Loss Reported (Line 3 Minus Line 4) | $20,000 |
For property treated as personal, the casualty loss deduction has been suspended through 2026 unless it is part of a federally declared disaster area.
Example: Mr. Green owns 40 acres of land (not in a federally declared disaster area) that suffers from storm damage. Mr. Green holds the property for personal enjoyment as it is used exclusively for recreational hunting. The loss is nondeductible.
For property treated as investment, the casualty loss is reported as an itemized deduction on Schedule A. This would only be a benefit if itemized deductions are more than the standard deduction.
Example: Mrs. Johnson owns 800 acres of timberland that suffers from storm damage. Mrs. Johnson holds the primari-ly for timber revenue and property appreciation. The loss is deductible as another itemized deduction.
For property treated as business, the casualty loss is reported as an ordinary loss on Form 4797.
Example: XYZ Company owns timberland for the purpose of generating a profit and forestry activities are conducted in a business-like manner. The $20,000 loss computed above is deductible as an ordinary loss.
The Disaster Reforestation Act (DRA) has received bipartisan support in U.S. Congress and will provide much-needed relief for owners who sustain casualty losses greatly exceeding their basis. The Forest Landowners Association has formulated this legislation and it is hoped that DRA will be included in the upcoming Farm Bill. Kingwood’s Pete Prutzman (retired) is a long-time Board member of the Forest Landowners Association.
More information on DRA (HR655 & S217) is on www.forestlandowners.com.
If you have any further questions about casualty losses, be sure to contact an accountant knowledgeable about timberland or contact Kingwood for a referral.