Timber The term "timber property" means your economic interest instanding timber in each tract or block representing a separate timberaccount. You can figure timber depletion only by the cost method. Percentagedepletion does not apply to timber. Base your depletion on your costor other basis in the timber. Your cost does not include the cost ofland. Depletion takes place when you cut standing timber. You can figureyour depletion deduction when the quantity of cut timber is firstaccurately measured in the process of exploitation. Figuring cost depletion.hotel rooms SarvarTo figure your cost depletion allowance, you multiply the number oftimber units cut by your depletion unit. Timber units.When you acquire timber property, you must make an estimate of thequantity of marketable timber that exists on the property. You measurethe timber using board feet, log scale, cords, or other units. If youlater determine that you have more or less units of timber, you mustadjust the original estimate. Depletion unit.You figure your depletion unit each year by taking the followingsteps. Determine your cost or adjusted basis of the timber on handat the beginning of the year. Add to the amount determined in (1) the cost of any unitsacquired during the year and any additions to capital. Figure the number of units to take into account by addingthe number of units acquired during the year to the number of units onhand in the account at the beginning of the year and then adding (orsubtracting) any correction to the estimate of the number of unitsremaining in the account. Divide the result of (2) by the result of (3). This is yourdepletion unit. Example.You bought a timber tract for $160,000 and the land was worth asmuch as the timber. Your basis for the timber is $80,000. Based on anestimated one million board feet (1,000 MBF) of standing timber, youfigure your depletion unit to be $80 per MBF ($80,000 divided by1,000). If you cut 500 MBF of timber, your depletion allowance wouldbe $40,000 (500 MBF multiplied by $80). When to claim depletion.Claim your depletion allowance as a deduction in the year of saleor other disposition of the products cut from the timber, unless youchoose to treat the cutting of timber as a sale or exchange. Includeallowable depletion for timber products not sold during the tax yearthe timber is cut as a cost item in the closing inventory of timberproducts for the year. The inventory is your basis for determininggain or loss in the tax year that you sell the timber products. Example.Assume the same facts as in the previous example except that yousold only half of the timber products in the cutting year. You woulddeduct $20,000 of the $40,000 depletion that year. You would add theremaining $20,000 depletion to your closing inventory of timberproducts. Choosing to treat the cutting of timber as a sale orexchange.You can choose, under certain circumstances, to treat the cuttingof timber held for more than 1 year as a sale or exchange. You mustmake the choice on your income tax return for the taxable year itapplies. If you make this choice, subtract the adjusted basis fordepletion from the fair market value of the timber on the first day ofthe tax year in which you cut it to figure the gain or loss to reporton the cutting. You generally report the gain as long-term capitalgain. The fair market value then becomes your basis for figuring yourordinary gain or loss on the sale or other disposition of the productscut from the timber. For more information, see Timber inchapter 2 of Publication 544,Sales and Other Dispositions ofAssets.. Form T.Attach Form T, Forest Activities Schedules, five star hotel in Perissato yourincome tax return if you are claiming a deduction for timber depletionor choosing to treat the cutting of timber as a sale or exchange.