Don’t pay too much tax on timber you sell or buy!
The tax treatment of timber sale income and management expenses is a highly specialized part of the federal tax code. Applying Sections 631(a) and 631(b) is best done with a professional forester’s help. Most tax preparers rarely see a timber sale and may not be familiar with these rules or how to apply them. If they don’t ask about species or volume harvested, we can work directly with your CPA to get your best savings.
Report timber income as a capital gain
The tax code allows timber income to be reported as a capital gain or as ordinary income. Timber held more than one year generally qualifies for long-term capital gain treatment, which is taxed at a lower rate than ordinary income.
Create a depletion account
A depletion account starts with your basis in the timberland. If you bought the land, the basis is what you paid, split between land and timber by the fair market value of each on the purchase date. If you inherited it, the basis is generally the value on the date of death. If it was a gift, you generally take over the giver’s basis. The timber portion is your timber basis, and it sets your depletion deduction.
Record management expenses
Some costs of a timber sale, such as forester fees, advertising, and legal fees, reduce the taxable amount of the sale. Others, such as boundary surveys, are added to your basis and can be recovered in part through depletion.
File Form T
Federal Form T supports the depletion deduction, expenses, and capital gain or loss. It is filed with your income tax return.
How depletion works
If you sold a cord of timber for $20 and your depletion deduction is $10 per cord, your taxable gain is $10. The depletion deduction is a tax-free return of your capital: the higher it is, the less income tax you pay.
People who bought their timberland recently usually pay little or no tax on a timber sale. People who bought long ago pay more, because their cost basis is lower.
Reported this way, timber income is taxed below your ordinary income rate, and you do not pay the 15.3% self-employment tax. With the depletion deduction included, the savings can be substantial.
Already sold timber?
Amended returns can claim a refund on timber sales from recent tax years, within the IRS deadline. Call us to find out if a past sale still qualifies.
Storm or fire damage?
A casualty loss from storm, fire, or other sudden damage may be deductible, limited by your timber basis. More about disaster relief
What we do and don’t do
We do not prepare general income tax returns. We specialize only in timber. We can assess your potential tax savings, create your depletion account, and prepare Form T for you or your tax preparer.