Any Timber Basis Experts on this Forum?

[BuckeyeAaron]

Hello all.  It's been quite a while since I've posted on this board but I am seeking advice from forester colleagues.  

I put together a timber basis for a client a few years ago for a property in SW Ohio.  This property was owned by two friends; equal shares.  The purchase price of the property was $460,000 and the sale occurred in early 2021.  The $460k acquisition cost was used when I allocated the basis by asset (standing timber, structures, bare land, and timbered land).  Since that time, one partner bought out the other partner.  The cost of this transaction was $150,000 and occurred in early 2023 - which brings the total acquisition cost to $610,000.  The owner contacted me seeking guidance on how to incorporate this additional capital investment, which occurred 2 years after the initial investment, into their basis.  I've tried researching this topic online and am struggling to fully understand it.  I keep coming across something called an "outside basis" but I'm not sure how to utilize that.  Another thought I had would be to calculate the NPV of the $150,000 back two years and add that figure to the $460k to come up with a cost - but that doesn't seem appropriate either.

Ultimately, the inventory and valuation I did still stands and is still relevant - which is really what my area of expertise is.  The answer may simply be "speak to your CPA or tax advisor on how to handle this issue."  I know that many consultants in my area don't go beyond providing the service of inventory and valuation - they leave the allocation to a tax pro.  And maybe its because of situations like this.

Has anyone ever handled a case like this before?  Any guidance?  I appreciate the time to read and respond.  

[Ljohnsaw]

In my simple mind, probably why I'm not a CPA, wouldn't it just offset? The on partner sold his share so the basis went down by the same amount the other went up.

Or, the selling partner lost $85k when he sold at a loss.  Selling out at $150k, the whole property is worth $300k, a net loss of $160k?

[BuckeyeAaron]

In my simple mind, probably why I'm not a CPA, wouldn't it just offset? The on partner sold his share so the basis went down by the same amount the other went up.

Or, the selling partner lost $85k when he sold at a loss.  Selling out at $150k, the whole property is worth $300k, a net loss of $160k?

Not quite.  I probably should have added more detail in my original post.  But the remaining owner essentially took over the loan of the owner that sold.  The $150k was to cover the appreciation of the property.  So now the current owner assumes the full original $460k plus the additional $150k of investment to become sole owner. 

Another thought would be to move the basis to the "new" acquisition date of 2023 by taking the 2021 inventory and growing the woods forward two years; assuming a 3% growth rate.  I could use that volume, and historic timber pricing from that time, to establish a new basis utilizing the $610k number (???).

[Ron Scott]

Yes, establish a new basis for the new single owner based on the 2-year added timber growth as you stated. A new basis should be reestablished based on the resale of the property.

[BuckeyeAaron]

Yes, establish a new basis for the new single owner based on the 2-year added timber growth as you stated. A new basis should be reestablished based on the resale of the property.

Thanks - that's what I ended up doing.  I appreciate the confirmation.