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: | |
|
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: | |
|
Allowable Loss |
= Depletion Unit x Number of Units Destroyed |
| = $7.44 per Cord x 272 Cords | |
| = $2,024 | |
| 3. Subtract any gain you recover or expect to recover from a salvage sale, insurance, etc. | |
|
Loss Deduction |
= Allowable Loss - Recovery |
| = $2,024 - $0 | |
| = $2,024 | |
| 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: | |
| $4,760 | |
| 2. Determine the fair market value of the timber destroyed: | |
| $3,808 | |
| 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. |
|
|
Loss Deduction |
= $3,808 - $0 |
| = $3,808 | |
Example provided by Dr. John L. Greene, Forest Economist, USDA Forest Service.