Following recent droughts, hurricanes, or other natural disasters, many timber owners may wonder if they can deduct timber losses on their federal income tax returns. As with many tax questions, the answer is often, “It depends.” While it sounds unhelpful, it reflects the complexity of factors that can influence the eligibility for the tax deduction. Furthermore, even if the timber losses are deductible, they may be subject to different deduction rules regarding types of losses, ways to calculate the deduction, and limitations on the deductible losses. These also have implications for the forms used to claim the deductions and documents for record keeping.
This article focuses on the tax treatment of timber losses from natural disasters for federal income tax purposes. The rules for income tax deductions for yard trees differ from those for timber. We’ll cover that topic in a future article. As mentioned in a previous article in this series, the classification of your timber holding has important tax implications. Timber holding can generally be classified as one of the following three types: 1) for personal use or as a hobby (not-for-profit); 2) as an investment; or 3) for trade or use in a trade or business.
Natural disasters and types of timber losses
Not all natural disasters are treated the same when it comes to timber loss deductions on your federal income tax returns. Timber losses from natural disasters could be treated as casualty losses or noncasualty losses.
- Casualty timber loss. If the timber loss is caused by natural disasters such as fire, storm, flood, hurricane, volcanic eruption, or earthquake, it could be treated as a casualty loss. For federal income tax purposes, a casualty is an identifiable event that is sudden, unexpected, and unusual. Suddenness is a key element, and it means the suddenness of the loss rather than the suddenness of the event itself (Rev. Rul. 87-59). Therefore, timber losses due to gradual deterioration are not considered casualty losses. For example, losses of timber following prolonged droughts (Rev. Rul. 90-61) or epidemic attacks of Southern Pine Beetles (SPB) are generally not considered casualty losses
- Noncasualty timber losses. Noncasualty timber loss is the loss of timber due to an identifiable event that is unexpected and unusual but does not meet the suddenness requirement. The loss may result from a combination of factors. For example, timber losses from prolonged droughts or epidemic attacks of beetles (e.g., mountain pine beetles, SPB) could qualify as noncasualty losses for landowners holding timber in a trade or business or as an investment.
However, tree mortality caused by routine disease and normal levels of insect infestation is considered a cost of doing business and is not treated as either a casualty loss or a noncasualty loss. These losses are recoverable through depletion when the timber is sold or harvested.
Tax treatment of casualty timber losses vs. noncasualty timber losses
There are several tax advantages to timber casualty losses compared to noncasualty losses:
- Deduction from ordinary income. Timber casualty losses are deducted from ordinary income, while timber noncasualty losses offset section 1231 gains first, which are taxed at the lower long-term capital gains rate.
- Eligibility. Casualty loss deduction is available for all types of timber holdings, including timber for personal use (subject to the $100 reduction and 10% adjusted gross income rule and presidentially declared disaster area). In contrast, noncasualty loss deduction is only available for timber held in a trade or business or as an investment.
- Loss estimation method. Timber casualty losses are estimated using a block approach (IRS, 2011). Deductible timber casualty loss is the lesser of (1) the adjusted timber basis or 2) the diminution in the fair market value of the timber block due to the casualty. In contrast, timber noncausality losses are estimated like a timber sale by multiplying the depletion unit by the quantity of timber destroyed. When the timber depletion block is large, and only a relatively smaller portion of it is damaged or destroyed, the deductible timber casualty loss could be greater than if the loss were considered noncasualty.
- Special provisions for federally declared disaster areas. If the timber casualty loss results from a presidentially declared disaster, you can deduct the casualty loss in the current year or on an amended return for the previous year.
Landowners may experience significant timber losses due to various natural disasters. Federal income tax provisions are available to help landowners recoup some of the losses. However, the tax treatment of timber losses varies depending on the type of natural disaster and the classification of the timber holding. In most cases, the deductible timber losses may not fully reflect the actual economic losses. Affected landowners are encouraged to consult with a forester and tax advisor for advice specific to their situation.
References
IRS. 2011. Timber casualty loss audit techniques guide.
Resources:
Li, Y. 2019. Income tax deductions for hurricane-damaged timber losses. University of Georgia.
National timber tax website: www.timbertax.org.
Tanger, S., Dicke, S., and Henderson, J. 2021. Frequently asked questions about timber casualty losses. Mississippi State University.
Wang, L. 2018. Income tax deduction on timber and landscape tree loss from casualty. USDA Forest Service.
Li, Yanshu. “Can I deduct timber loss from natural disasters?” Southern Ag Today 4(34.3). August 21, 2024. Permalink
