EXAMPLE: 10 years ago you acquired a 40-acre loblolly pine plantation for a total cost of acquisition of $20,600. At that time the trees were just 8 years old, but you assigned value to their years of growth and allocated $15,840 to your Land Account and $4,760 to your Timber Account. Last year, 17 acres of the trees were completely destroyed by a fire. Immediately before the fire, the entire plantation contained 640 cords of pulpwood, of which the 17 acres that burned contained 272 cords with a fair market value of $3,808. Calculate your casualty loss deduction.
|If you use the traditional approach, your casualty loss deduction will be--|
|1. Determine the depletion unit:|
|= Total Adjusted Basis ÷ Total Timber Volume|
|= $4,760 ÷ 640 Cords|
|= $7.44 per Cord|
|2. Multiply the depletion unit by the number of units destroyed:|
|= Depletion Unit x Number of Units Destroyed|
|= $7.44 per Cord x 272 Cords|
|3. Subtract any gain you recover or expect to recover from a salvage sale, insurance, etc.|
|= Allowable Loss - Recovery|
|= $2,024 - $0|
|If you use the "block" approach, your casualty loss deduction will be--|
|1. Determine your total adjusted basis in the "block" on which the loss occurred:|
|2. Determine the fair market value of the timber destroyed:|
| 3. Compare the two amounts: your deduction is the smaller amount, minus any gain
you recover or expect to recover from a salvage sale, insurance, etc.
|= $3,808 - $0|
Example provided by Dr. John L. Greene, Forest Economist, USDA Forest Service.