The tax filing due date is a couple of months away, but it's not too early to start collecting information and planning for your return. Woodland owners and landowners planting trees for timber production may be able to take advantage of some parts of the tax code to reduce their bill, if they know what to look for and how to file to receive the best treatment of their income under the law. Several resources are available to help you drill down to those parts of the code that could provide you with some tax breaks. For those who have sold timber in 2014, depending on your individual situation, you may be able to deduct the costs associated with selling timber and the cost basis of the timber from gross income. Basis is the amount you paid for the timber when you purchased the land, or the value of the timber when you inherited it. Since land with standing timber is normally sold as a set value per acre combining both the bare land and timber value, you will need to collect some information and do some calculations to determine basis. A discussion of basis and how it is calculated and used can be found by viewing this FNR Extension publication Determining Tax Basis of Timber.
Timber held for more than one year prior to sale may be eligible for the long-term capital gains income tax rates, providing a much lower rate than the ordinary income tax rates. Profits from selling logs, lumber, or other products derived from harvested trees are not normally eligible for capital gains rates. How you select to sell your timber may inlfuence how the timber is taxed as well. Additional information on determining the type of income your timber sale revenue represents can be found by viewing this FNR Extension publication How to Treat Timber Sale Income.
Costs associated with planting at least one acre of trees for timber production may be eligible for deductions that could reduce your tax bill. A discussion of the investment and tax status of tree plantings can be found by viewing this FNR Extension publication Financial and Tax Aspects of Tree Planting.
Tree planting and forest management practiced as an investment are long-term activities, so limiting your costs to manage these activities over time has a big impact on future return on your investment. Managing your tax liability is an important part of that equation.
In addition to the Purdue Extension publications linked above, the US Forest Service provides an annual publication, Tax Tips for Forest Landowners, to provide updates on income tax issues.
The information in this article is intended to help you find resources to answer tax questions, but should not be considered individual tax advice. Consult appropriate tax codes and professionals about your individual circumstances.
www.timbertax.org, National Timber Tax
U.S. Forest Service
The Education Store, place in the search field "timber"
Lenny Farlee, Sustaining Hardwood Extension Specialist
Hardwood Tree Improvement and Regeneration Center
Department of Forestry & Natural Resources, Purdue University