How you treat the expenses and income associated with your forestland for tax purposes depends on the scope and nature of your timber-related activities. If you have a small holding with occasional transactions, you would most likely treat these activities as an investment. If your holdings produce regular and continuous transactions, your forestland may constitute a business. Regardless of your tax status, it is extremely important to maintain thorough records for all management activities and costs.
Money from a timber sale could significantly raise your taxable income, but part of that money is your investment, or basis, in the timber sold. The basis must be adjusted up for new purchases or investments and down for sales and disposals. In general, it is most often advantageous to report your timber sale income as a capital gain rather than as ordinary income. Capital gain income is taxed at a lower rate than ordinary income and is not subject to the self-employment tax. These points are made to emphasize the importance of considering federal income taxes and knowing your tax status before planning a timber sale, but they are by no means complete. Consult a tax attorney, certified public accountant or a knowledgeable forester about your specific tax situation. For the latest timber tax updates and information see the sites listed below.
- USDA Forest Service - Forest Taxation
- The National Timber Tax Website
- The Forest Landowners Tax Council
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