by Linda Wang, National Timber Tax Specialist, USDA Forest Service …
The Federal income tax laws contain forestry-specific provisions
that are important for managing and conserving timber. This
publication provides forest owners, foresters, loggers, and timber
businesses a guide of the applicable Federal income tax laws,
including the latest tax law changes, for filing their 2019 tax
returns. The information is not intended to render legal or
accounting advice and is current as of September 30, 2019.
Timber Property Classifications
Classifications of your timber property for tax purpose are
important as the tax treatment and the associated tax reporting
vary considerably for each property type. Depending on your
ownership purpose, how you use the property, and your
activities, there are three types of timber classifications: (1) an
investment property (mainly used for producing income from
growing timber or asset appreciation); (2) personal-use property
(mainly used for personal enjoyment versus for profit); and 3) a
business property (having regular, active, and continuous
income-producing timber activities). If you do not materially
participate in the business (i.e., “passive activity”), losses from
such business are not deductible against income of nonpassive
source (passive loss rules). Also, if the profit objective is not met,
your timber activities may be considered a hobby rather than a
business. Losses that are deductible for a business are not allowed
for a hobby. Depending on the specific situation, woodland or
tree farms are typically not considered as “farming” for tax
purpose. You must make a determination of your timber property
categorization each year.
Example 1: In 2019, you had a timber sale from your 49-acre
timber property. You own the timber mainly for profit and
classify your timber as investment.
Timber Sales
Sale of standing timber held as investment or personal-use may
qualify for the beneficial long-term capital gains, rather than as
ordinary income, if you own it for more than 1 year before the
sale (inherited timber is automatically considered long-term). Sale
expenses and the timber depletion (see below) are deductible from
the sale proceeds. Use Form 8949 and Form 1040 Schedule D to
report the sale.
Example 2: In 2019, you sold your standing timber for $20,000.
Your selling expenses were $2,500. You owned the timber as an
investment for 10 years. The sale qualified for long-term capital
gains that can be reported on Form 8949 and Form 1040 Schedule
D. The $2,500 selling expenses were deductible from the sale.
Under Section 631(b), business timber sale may be eligible for
long-term capital gains (Section 1231 gains) if the timber is held
for more than 1 year before the sale. Use Form 4797 and Form
1040 Schedule D. It is prudent to file Form T (Timber), Forest
Activities Schedule (see below).
Example 3: Your forester administered a timber sale for you using
the competitive bidding method. You accepted the highest bid.
Because you owned the timber in your business for more than 1
year before the sale, the standing timber sale qualified for longterm capital gains.
Different rules apply if the business taxpayer cut his or her timber
(or had “a contract right to cut” the timber) to sell or to use in his
or her trade or business. To qualify for the long-term capital gains,
the taxpayer must own such timber for more than 1 year and elect
to treat the cutting as a sale. That is, make the Section 631(a)
election on Form T, Forest Activities Schedule, Part II.
Example 4: You hired and directed a logger to cut your standing
timber and sold the logs to a mill you specified for $20,000. From
the sale, you paid the logger $4,000 for cutting and hauling the
timber. Assuming the fair market value (FMV) of the standing
timber on January 1, 2019, was $15,000, and your timber
depletion (see below) was $2,000, if you made a Section 631(a)
election, you could report $13,000 ($15,000 – $2,000) as capital
gains, and $1,000 ($20,000 – $15,000 – $4,000) as ordinary
income.
Taxpayers (other than corporation) may deduct up to 20 percent
of qualified business income subject to taxable income and wage
and/or property basis limitations if applicable. However, Section
1231 gains that are treated as capital gains are not qualified
business income. Also, timber sales from an investment or passive
business may be subject to a 3.8-percent net investment income
tax for single taxpayers with adjusted gross income (AGI) over
$200,000 (or $250,000 for couples).
Form 1099-S
Form 1099-S, Proceeds from Real Estate Transactions, is
required for lump-sum or pay-as-cut standing timber sale
(Corporate and high-volume business sellers are exempt.).
Timber Basis and Depletion Deduction
The basis of your timber refers to your investment in the timber
and is defined differently depending on how you acquire your
timber property. For purchased property, your timber basis is its
purchase cost, allocated separately from that of land. For gifted
property, it is the donor’s adjusted basis when the FMV of the
timber at the time of the gift is equal to or more than the donor’s
adjusted basis.