About allocating cost basis

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Reference no: EM131851027

Mr. Brad, a client of the Center for Forestry Business, had a question about allocating cost basis. He stated his situation to us as follows:

"Someone purchases 32 acres for $2,200/ac. The timber is sold immediately thereafter for $1,700/ac, leaving $500/ac. Land prices in the area are normally around $1,000/ac, possibly more for a small parcel like 32 acres. I have been told that the owner must allocate something close to the prevailing land rates and then show gain on the timber sales."

You, as a specialist of the Center, are in charge of this case. Please explain to Mr. Brad about cost allocation and how that affects depletion.

Reference no: EM131851027

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