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Tax Advantages of Timber Ownership

Filed Under:
December 6, 2019


Announcer: Farm and Family is a production of the Mississippi State University Extension Service.

Amy Myers: Forest landowners have to pay taxes, but does forest ownership provide benefits with regard to taxation?

John Kushla: Yes, forest ownership does give landowners some benefits with regard to taxation on timber. Tax benefits as based on capital appreciation, timber sales, ownership class, and recovery of reforestation costs.

Amy Myers: So what is meant by capital appreciation?

John Kushla: The IRS considers forest land ownership as a form of capital. In the case of forest land, trees grow.  Moreover, as trees become bigger, they become more valuable. The greater volume of a log from a bigger tree means more things can be made from that log. Small trees are chipped for making paper or chip board.  Big trees can be sawn for lumber or timbers. So, forest landowners do not pay tax on their growing trees until they are sold and harvested

Amy Myers: Are there other tax breaks forest landowners after selling timber?

John Kushla: Yes.  As long as the timber has been owned more than a year, timber sale proceeds can be taxed as a capital gain rather than as ordinary income. Furthermore, tax is only paid on the net gain. So, a forest landowner may deduct all the costs associated with selling the timber before calculating tax. Such costs may include a consulting forester fee, a boundary survey, and attorney fees. The capital gains tax rate ranges from 15-20% for individuals making more than $38,700 or couples making more than $77,400. The tax on ordinary income ranges 22-37% at those net earning thresholds

Amy Myers: How do ownership classes benefit forest landowners?

John Kushla: The greater the profit motive for owning timber, the greater the tax breaks. Ownership classes for timber are as follows:

Hobby owner has no profit motive; he just enjoys the land.

Investment owner:  Is a passive participant in their forest management

Business owner:  Actively participates in their forest management

Farmers (growing row crops, livestock, aquaculture) are a special class of business owner. Business owners are able to deduct ordinary and necessary expenses the year in which they occur. To do this, business owners must:  Have a written forest management plan, earn most of their income from their forest land, meet one of seven material participant rules in any given tax year. Hobby and investment owners may only deduct ordinary and necessary expenses the year in which they have a timber sale

Amy Myers: Are there any other benefits to timber ownership?

John Kushla: Yes.  To keep generating revenues from their forest, landowners must invest in growing the forest back after harvest. Both the Internal Revenue Service and the Mississippi Department of Revenue provide tax breaks to forest owners for recovering some or all the reforestation costs of growing that next forest. Both the federal and state governments recognize that forestry is a capital-intensive endeavor, and provide tax incentives to encourage reforestation. Reforestation costs typically include site preparation, tree seedlings, planting, and herbaceous weed control the first growing season after clearcut harvesting. The IRS allows for tax deductions up to a period of 8 years after reforestation. The state of Mississippi allows for a reforestation tax credit up to half the average value of reforestation expenses

Amy Myers: So, give me a summary of what we’ve talked about today.

John Kushla: Forest landowners only income tax on their growing timber once harvested. Timber sales are subject to capital gains tax treatment if owned more than a year. Demonstrating a profit motive entitles forest landowners to more tax breaks. Landowners can recover some or all their costs for reforestation. For further questions contact your local Extension office.

Announcer: Farm and Family is a production of the Mississippi State University Extension Service.

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