WHEN IT COMES TO TIMBER TAXATION, THERE ARE THREE OWNERSHIP CLASSIFICATIONS:
PERSONAL PROPERTY: used for personal or recreational enjoyment with no intent to make a profit
INVESTMENT PROPERTY: acquired and managed with intent to generate a profit from the sale of timber and/or land
BUSINESS PROPERTY: a profit is generated with frequent and regular activity
HOW DO YOU DISTINGUISH BETWEEN THESE CLASSIFICATIONS?
PLANS AND DOCUMENTATION. When it comes to IRS substantiation, you can never document too much. A written and updated forest management plan is the first step in supporting the profit motive. A detailed timber inventory is not only a requirement to substantiate the basis, but it is also more support for the profit motive. Bookkeeping records and travel logs differentiate business property from personal property. These documents alone do not make the timber ownership a business, but they support the facts and circumstances needed for a profit motive and favorable tax treatment.
The casual investor in timberland for personal use will qualify for the favorable long-term capital gain rates (0 percent, 15 percent, 20 percent) if the timber and land are owned for more than a year. However, to get the benefit of timber management expenses, a timber owner will need to substantiate their holdings as a timber business.
Thanks to a couple of Internal Revenue Code elections, (631(a) and 631(b)), timber businesses can also benefit from the long-term capital gain rates. To accomplish this, the tax preparer needs to be aware of the requirements under these code sections and the proper forms on which they report the timber activities.
The new tax law has eliminated the miscellaneous itemized deduction category where most casual timber investors were allowed deductions for timber investment management expenses and casualty losses. Still, with the right planning, documentation of profit motive and hands-on activity, many timberland owners can continue to receive meaningful tax benefits.
MEET THE EXPERT
Gregory E. Sellers, CPA, AEP® is a member in Warren Averett’s Tax Division and is a leader of the Estate and Trust Service Area. He has more than three decades of experience in public accounting. Reach him at 334-260-2350 or firstname.lastname@example.org.