tax tips for forest landowners 2024

Source:  https://www.fs.usda.gov/sites/default/files/fs_media/fs_document/2024-tax-tips.pdf

FS-1261 | December 2024

Tax Tips for Forest Landowners: 2024 Tax Year

Yanshu Li, Tamara L. Cushing, and Gregory E. Frey

As a private forest landowner, you might only consider timber- related Federal income taxes when you have a timber sale.

However, each forestry activity you conduct can have tax implications. Generally, all income received is taxable unless explicitly excluded by tax law, and nothing is deductible unless a provision allows it. Understanding the forest-related provisions and integrating tax planning into your forest management can help lower your tax.

This publication is intended to be an informational and educational resource for you and your tax advisor. It is not intended as financial, tax, or legal advice. Please consult with your tax advisor concerning your tax situation. The information is current as of December 15, 2024.

Know the Tax Classification of

Your Forest Ownership

The classification of your forest ownership affects applicable tax rates, availability of deductions, and filing requirements. Your forest property generally falls into one of the following three broad categories:

    (1) Personal use or hobby. Your primary purpose for owning the property is for personal use, enjoyment, or hobby, rather than earning money. Tax deductions are limited under this category.

    (2) Investment. You intend to make a profit from the property (profit motive); however, your activities and involvement do not rise to the level of a trade or business (see below). Tax deductions are relatively limited.

    (3) Trade or business. You have a profit motive, and your forestry activities are conducted in a business-like manner. Your involvement in the business may be material participation or passive (determined annually). Material participation implies regular, continuous, and substantial activity and results in greater tax deductions and faster cost recovery. Losses from passive activities can only offset passive income.

Some farmers may own forests as a small part of their farming business and receive periodic income from timber sales. Tax rules for timber sales generally apply in these cases. In general, income tax provisions do not treat forestry as part of the farming business, though there are a few exceptions.

The Internal Revenue Service (IRS) determines whether an activity has a for-profit motive or meets the material participation test based on many factors. Objective facts carry more weight than a taxpayer’s statement. Record keeping is crucial to substantiate your profit motive and level of involvement. See IRS Publication 925 and FS-2007-18 for details.

Understand Timber Sale Income and Recovery of Timber Basis

Your taxes on timber sales depend on many factors, including your forest ownership classification, holding period, and the method of selling timber. You pay taxes on the net income from timber sales, rather than the gross proceeds. To find your taxable net income, subtract the following from your gross proceeds:

        ◦ Selling expenses (e.g., forester fees, appraisal, attorney fees).

        ◦ State/local severance, harvest, or yield taxes.

        ◦ Timber depletion allowance (or allowable timber basis).

Sale of Standing Timber

Usually, income from the sale of standing timber held for more than 1 year qualifies for the lower long-term capital gains tax rate (0, 15, or 20 percent—depending on your taxable income). If you inherited timber, you are considered to have held the property longer than 1 year, regardless of how long you actually held it.

Personal-use and investment owners use Form 8949 and Schedule D (Form 1040) to report a lump-sum timber sale. Use Form 4797 (Part I) and Schedule D (Form 1040) to report the sale if sold under a pay-as-cut contract.

Dr. Yanshu Li is an Associate Professor of Forest Economics and Taxation at the University of Georgia.

Dr. Tamara L. Cushing is an Extension Assistant Professor of Forest Economics and Business at the University of Florida.

Dr. Gregory E. Frey is a Research Forester at the U.S. Department of Agriculture (USDA), Forest Service, Southern Research Station.

This publication is based on the “2019 Tax Tips for Forest Landowners” published by Dr. Linda Wang of the USDA Forest Service with updates for the current tax year. We greatly appreciate the insightful comments on the earlier version of this publication from Andrew Bosserman, Andrew J. Fast, Shaun M. Tanger, Luanne Lohr, Jesse Henderson, and Stephanie Worley Firley. All errors remain the authors’. The findings and conclusions in this publication are those of the authors and should not be construed to represent any official USDA or U.S. Government determination or policy.