It’s easy for an owner of forested acreage to forget about all those trees until it’s tax time.
Dr. Kurt Smith, assistant professor of forestry and Extension specialist, NC State, said everyone’s tax situation is different, and to compound the issue, tax laws are continually evolving. However, forested land is a major player in the economy and should be taken seriously.
“Four percent of the GDP in the U.S. is predicated on forestry,” said Smith. “States are losing forested acreage to development, so it’s important for people to maintain productive forests.”
He added that since most woodlots are harvested for profit just once or twice in the owner’s lifetime, it’s important to get things right when it comes to taxes.
The aging population of landowners and decrease in acreage are also problematic. “The average age of forest landowners is 62,” said Smith. “The average size of a forest holding is down to 29 acres, which points out fragmentation.”
Timber land value is separated into two components: the land itself and any uncut standing timber. The value of each should be considered on its own to maximize tax advantages.
“You can save yourself a lot of money if you realize the benefits of looking at the value of standing timber,” said Smith. “Once you cut timber, it’ll be treated as ordinary income and subject to a lot of taxes. But if you look at standing timber from the point of purchase forward, you may be able to save a lot of money in capital gains.”
Like other property, forested land is assessed according to “basis.” Smith described basis as the value of the timber from point of purchase forward less the expenditures made on the property through improvements. The other consideration for basis is how the property was acquired.
Knowing how the property was obtained – through a gift, through inheritance or through purchase – is important in preparing a tax strategy, as each has different tax implications. For purchased forest land, the original basis is the total acquisition costs allocated to the timber. The basis of inherited forest land is on fair market value upon the date of the decedent’s death. For property received as a gift, the basis is generally the donor’s basis plus the gift tax.
Smith said forestry-related cost share programs may help landowners, including the Forest Health Protection Program (FHPP), Conservation Reserve Program (CRP), Environmental Quality Incentives Program (EQIP) and some state programs.
Land value and the value of uncut timber are considered separately for tax purposes. Photo by Sally Colby
Kevin Burkett, Extension associate, Clemson University, delved into the details of forestry taxes. He said landowners may be unfamiliar with some of the complex tax implications and leave money on the table – especially if they aren’t filing taxes themselves. He suggested working with a tax preparer who has experience with forestry and timber.
Burkett said basis determines how much the landowner can depreciate and take as an expense on resources. “With natural resources, we deplete the basis,” said Burkett. “Basis also determines gain or loss when the asset/property changes hands. Depreciation and depletion can cause basis to go down, and capital improvements or capitalized costs can cause basis to go up.”
The basis for timber property should be determined when the property changes hands. “Sometimes when it changes hands, the basis at that point is not determined, and while there might be a number associated with the timber or land, it gets lost over time,” he said. “Timber is something owned for a long time and records might be lost.”
In a timber property transfer, multiple assets are transferred. “There are at least two assets being transferred,” said Burkett. “The land and the timber, and in some cases, buildings.” However, such entities are not typically broken down in a sale.
The term “back cruise” refers to the value of the timber and the basis of timber when the original owner acquired it. The basis is now handed over to a new owner and must account for any sales or thinning. The back cruise also provides a basis for gifting.
For inheritance and gifted land, the value can be determined at the time of inheritance. A gift can be based on historical records (or back cruise). “Can we do a back cruise on the timber and determine what the basis of the timber was when the original owner acquired it?” asked Burkett. “Account for sales or services such as thinning that occurred during the time period.”
The term “timber cruise” refers to the process of measuring forest stands to determine average tree size, species, volume and quality. A timber cruise helps determine a volume estimate for appraisal and sales.
If land has been held for a long time and the cost of hiring a consulting forester will be substantial, Burkett said it may not be worthwhile because the benefit is minimal. “If you don’t have verifiable data for the basis, it’s assumed to be zero,” he said. “As the basis goes up or down, it will impact the gain.” If harvest occurs over several months or throughout the year, the timber basis is depleted as timber is cut.
Timber sales will result in the owner receiving a Form 1099-S. Necessary information includes who purchased the timber and sales proceeds. It’s up to the landowner to provide historical information on the basis. If the property is historical and has been handed down via gifts, the historical basis will likely be low.
Timber is treated as a capital asset that comes with capital gains treatment, which means more favorable tax rates. While landowners often try to avoid capital gains, long-term capital gains are far more favorable than ordinary rates and depend on the current income level and tax rates.
“Even if you have short term capital rates where you’ve held the investment for less than a year, which doesn’t happen, you still get some benefit because you don’t have to pay self-employment tax,” said Burkett. “The NIIT (Net Investment Income Tax) applies when income is $200,000 or greater for a single filer or $250,000 or greater for joint filers. It’s a 3.8% surtax on top of the investment income.”
Both Smith and Burkett recommend forest landowners work with a professional forestry consultant to ensure all aspects of management and taxation are considered.
by Sally Colby
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