Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, March 26, 1990                   TAG: 9003232822
SECTION: BUSINESS                    PAGE: A-7 MONDAY   EDITION: METRO 
SOURCE: 
DATELINE:                                 LENGTH: Medium

TIMBER TAX STANDS AS CAPITAL ASSET

In July 1989 we signed a contract to sell the timber and receive half of the income at the time we signed the contract and the other half in 1990.

We retired in 1983 and are both over 65 years of age. We had planned to hold this property to help out on our retirement. Now we are told that the income has to be reported at the time it is collected and cannot be prorated.

A: The timber grown on the cut-over land acquired in 1961 would have no cost basis. Standing timber is a capital asset, and its sale in 1989 is treated as the sale of a capital asset. The amount received is to be reported in Schedule D and that amount transferred from Schedule D to line 13 of the return, Form 1040.

Unless the law is changed, capital gains are presently 100 percent taxable, the same as ordinary income. As you know, President Bush is trying to change this.

The amounts received in 1989 and 1990 are to be included in your income for each of the years.

Stumped on depletion

Q: Thirty-seven years ago I set out eight acres of white pines for timber. It is becoming time to harvest these trees. If I sell the trees to a lumberman on the stump, and if he cuts and removes them, how is the income I would receive taxed?

A: Standing white pine or any timber that you have owned for more than a year which is sold on the stump or under a cutting contract is treated as a sale under Section 1231.

The difference between the amount realized from the sale and its adjusted basis for depletion is treated as a gain or loss. Include this amount on Form 4797 along with your other Section 1231 gains and losses (if any) to figure whether it is treated as capital or ordinary gain or loss.

Your adjusted basis for depletion would include your costs in setting out the pines and developing them over the years (deducted pro-rata based on the amount cut).

There is a good explanation of this at page 40 of IRS publication 225, Farmer's Tax Guide, available at most IRS offices.

Answers to these tax questions were provided by members of the Roanoke Area chapter of the Virginia Society of Public Accountants.

Volunteering their services to help taxpayers are Bob Benson of Meeks, Benson & Associates in Rocky Mount; Maryanne McElmurray of Brown, Edwards & Co.; Steve Kluttz and Noha Melki of Young & Prickitt; Bob Elliott of Foti, Flynn, Lowen & Co.; John Lauer of KPMG Peat Marwick; Cindy Caraway of Dominion Bankshares; and Lee Ann Hodge of Anderson & Reed.