Tax Tips for Forestland Owners

In this Analysis, Darwin L. King CPA and Edward D. King discuss the United States Department of Agriculture (USDA) Forestry Service tax tips that have been published over the last five years including legislative changes that landowners must be aware of as timber taxation is enacted. The USDA Forestry Service has developed excellent online resources to assure that non-industrial forestland owners have access to the best available information on forest related tax laws. The authors write:

Frequently Asked Timber Tax Questions

     As mentioned earlier, the USDA Forest Service has produced an excellent publication that summarizes common tax questions from timber operators. The document contains questions related to the type of income generated when timber is sold, the type of expense incurred including operating, capital, and reforestation expenses, types of operating expenses that are deductible, casualty and theft loss deductions, and other areas. The authors review several important questions in the following paragraphs.

     One important question is how the gains will be treated if the timber is held either for investment or for business purposes. Timber held as an investment is considered to be a capital asset. As such, the gains are treated at favorable capital gain rates if the holding period is satisfied. In most cases, the long term holding period is more than one year. The taxpayer would report the gain on IRS Form T (Forest Activities Schedule). The gain would then be transferred to the taxpayer's Schedule D (Capital Gains and Losses). If the timber operation is a trade or business, the long term holding period also applies in order to receive capital gain treatment on most sales. Timber sold to customers as stumpage including timber specified in a right-to-cut contract normally qualifies for capital gain treatment. Gains from business operations are also reported on Form T and then transferred to Form 4797 (Sales of Business Property) and Schedule D (Capital Gains and Losses).

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A Review of USDA Tax Tips 2007-2011

     Tax tips published by the USDA Forest Service in 2007 include a variety of topics. First, the service discussed the taxpayer's purpose for owning timber. The tax tip sheet described three reasons for owning forestland which included personal use, investment or income producing, and as a trade or business. The tip sheet continued with a discussion of how to calculate the tax basis of the timber, a definition of timber management expenses and timber planting costs. Finally, the concise two page document described how timber sales can often qualify for long-term capital gain treatment and a review of timber casualty and theft losses. The importance of Form T "Forest Activities Schedule" was also reviewed. This small document provided taxpayers with information on a number of valuable topics of interest to a majority of timber owners.

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Comments

BEND OREGON
  • 01-25-2012

Thank you for your well written article on tax tips for Forest Land owners. I am passing this on to a real estate client of mine in Bend, Oregon.