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Comprehensive Guide to Taxes for Forests & Tree Farms

This guide by Rick Hamilton covers income tax implications, timber sales, basis cost-share payments, reforestation tax incentives, and estate highlights for working forests and tree farms. Learn about gross income, costs of sale, and more.

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Comprehensive Guide to Taxes for Forests & Tree Farms

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  1. Taxes for Working Forests and Tree Farms

    Rick Hamilton, NC RF Extension Forester, Retired
  2. Income Tax Implications Timber Sales and Basis Cost-Share Payments Reforestation Tax Incentive Estate highlights
  3. Timber Sales Gross Income $50000 Costs of Sale (8500) Basis (21500) Net Taxable Income $20000
  4. Timber Sale (cont.) Net Taxable Income $20000 Long-Term Capital Gains (LTCG) 1 Year Holding Period For Both Investors and Businesses Report on Schedule D (Investors) Report on 4797 (Business)
  5. LTCG Rates Income*Ordinary RateLTCG** $0-16,050 10% 0% $16,051-65,100 15% 0% $65,100-131,450 25% 15% $131,451-200,300 28% 15% $200,301-357,700 33% 15% $357,701+++ 35% 15% *Married Filing Jointly, **2008-2012
  6. COST OF SALE Tree marking Scaling Cruising Temporary roads Consultant fees Legal fees Advertising fees Survey Etc….
  7. Timber BasisWhy is it important? Basis reduces timber sale proceeds Basis or FMV (whichever less)=loss Only the net amount is taxable (Tax Code §1001(a))
  8. An Example Joe inherited a timber tract in Louisburg 2 years ago. What is his timber basis?
  9. Answer to the Example Timber quantity and price 2 years ago in Joe’s land: Pine sawtimber 100 tons x $30/ton = $3,000 Pine pulpwood 200 tons x $6/ton = $1,200 Hardwood pulpwood 300 tons x $4/ton = $1,200 $5,400
  10. Land with Pre-Merchantable Timber The FMV of timber generally means $/acre
  11. Special Tips for Timber Basis Timber basis has two parts: timber quantity and $ value (Tax Regulation §1.611-3)
  12. Special Tips for Timber Basis Basis must be allocated between land and timber (Tax Regulation §1.611-3)
  13. Timber Basis For purchased property, timber basis is the purchase price plus acquisition costs
  14. Timber Basis For gifted property, if no gift tax is paid, the basis is: (a) donor’s adjusted basis (gain at disposal) (b) the lower of the donor’s adjusted basis or the FMV (loss at disposal) (§1015 and §1.1015)
  15. ADJUSTED BASIS Original plus: Capitalized Expenses Carrying charges Capital improvement investment OR Original Minus: Depletion Casualty loss deduction Business loss deduction
  16. BACK CRUISE Use to establish a basis Allocates timber value at time of acquisition 4 step process Determine present volume Estimate growth over period since acquisition Reduce present volume by growth Volume past X stumpage past = Basis Note: Limited by purchase price or by FMV accepted by IRS
  17. ESTIMATED TAX FROM TIMBER SALES Estimated taxes should be paid on income resulting from a timber sale. Exceptions: Farmers with at least 2/3 of their income from agriculture, are exempt from filing estimated tax.
  18. Reforestation Tax Treatment First $10,000 is fully deductible Write-off (84-months) of all amounts over $10,000 Both deductions taken as “Adjustments to Income” (no need to itemize) Equally available to small businesses and investors. Elected on a property by property basis each tax year. May not include cost-share amounts excluded from income (IRC 126)
  19. EXCLUSION OF COST-SHARE PAYMENTS Must be for approved practices under approved programs. Rental payments such as CRP do not qualify. Neither do payments for perpetual or temporary easements. Payment must not substantially increase the gross receipts of the landowner from the property being improved.
  20. NEW FERTILIZER RULES Revenue Ruling 2004-62 Allows deduction of fertilizer expenses in the year incurred. Owners will need to file Form 3115 if changing from amortization to expensing.
  21. CASUALTY LOSS Fire Hurricanes Wind Ice, Sleet, Hail Earthquake Volcano Auto, Plane Crash Combinations of above “Sudden, unexpected, unusual…”
  22. CASUALTY CALCULATION Casualty loss is limited to FMV OR Adjusted Basis Whichever is less!
  23. SALVAGE Sales receipts from salvage Less: Adjusted Basis Less: Costs of Sale Plus: Insurance recovery Equals: Net Gain or Loss
  24. TAX DEFERRAL FROM GAIN Income tax deferral if casualty gain is re-invested in “like” property within two tax years. Standing timber Timberland Seed or seedlings Reforestation Costs Note: Concept also applied to other “involuntary conversions”, bark beetles, drought for example.
  25. DROUGHT Rev. Ruling 90-61 permits a deductible loss if drought causes greater than normal mortality. Amount of Loss: Loss limited to adjusted basis in property Depletion used for merchantable timber Nature of the Loss: Non-casualty involuntary conversion (1231) Loss available to both investors and business
  26. BARK BEETLES Does not qualify as casualty loss. Does qualify as business loss (165). Loss limited to adjusted basis or reduction in FMV. Loss is ordinary if no offsetting capital gains from salvage. Loss is capital loss if long-term capital income results from salvage (just like any other timber sale). Net gain qualifies as involuntary conversion (1033) eligible for non-recognition of gain if replacement properties purchased with proceeds within two years. Loss is equally available for investors and businesses, not subject to passive loss rules.
  27. Tax rate and Exempted Amount YearTax Rate Exempted Amt. 2009 45% $3,500,000 2010 Repeal of Estate Tax (no step up on all assets, limited to ~$4.3 million) 2010 35% $5,000,000 2011 35% $5,000,000 2012 35% $5,000,000 2013 55% $1,000,000
  28. Stepped Up Basis 2005-09 ````FMV Date of Death 2010 Limited to $1.3 million per decedent Additional $3 million to assets transferred to spouse Required to file “return relating to large transfers” 2011 Back to Unlimited Step-Up Transportability of “unused” Spouse Exemption
  29. Other Important Considerations Portability of Residual $5 Million per Spouse IRC 2032 to increase to $1,020,00 Farming/Forestry Special Use for 10 years 2013 Rate to Climb to 55% 2013 increase to Capital Gains rate of 3.8% ( part of the Health Care act)
  30. Tax Resources National Timber Tax Website:www.timbertax.org Extensive: Income, estate and property law Professional referencing www.ruraltax.org Service and Publications by Extension, State Agency and University
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