Landowners in the United States may sell timber off their land to earn some extra money, or they may operate thousands of acres of land as a full time job. Whether a taxpayer has small or large landholdings, he will usually pay a capital gains tax at the state and federal level when he sells timber. Landowners can take steps to reduce their tax burden by writing off expenses and taking special deductions permitted by the Internal Revenue Service.
If a landowner purchases a parcel of land with fully grown trees and has the trees harvested before owning the land for 12 months, he will pay regular income tax rates and Social Security and Medicare taxes on all profits from the timber sale. In the United States, individual income tax rates range from a low of 10 percent for taxpayers who earn up to $8,500 in annual income up to 35 percent for landowners who earn $379,150 or more in a tax year as the date of publication, according to Oblivious Investor. Social Security and Medicare taxes equal 13.3 of all profits with a cap of $11,107.2 in Social Security payments.
Landholders who own land for a year or longer and sell the timber receive preferential tax treatment, because the IRS considers these sales as capital gains and does not asses Social Security and Medicare taxes on profits. Landowners in the 10 or 15 percent tax brackets will pay 0 percent tax on their timber profits, while landowners in the 25 percent tax bracket or greater will pay a flat 15 percent capital gains tax rate.
Most states charge a flat rate of between 0 and 9 percent on capital gains regardless of whether gains are short or long term, but a few states offer a reduced tax rate for long-term gains, according to The REI Brain.
U.S. landowners can soften the bite of their tax blow by reforesting timbered land during the same tax year, resulting in a maximum tax deduction of up to $10,000 per parcel of land, according to the Internal Revenue Service. They can also deduct from the cost basis of their land timber damage due to insects, fire, wind or vandalism if they attach Form T to their 1040 tax return and complete Part II of this form.
When attempting to lower their income tax or capital gains owed, landholders should be sure to write off all of the expenses associated with growing and managing their trees, which can involve equipment and labor expenses. They should also write off the cost of the harvesting of the trees. Timber owners cannot depreciate the value of their land, but they can deduct the total cost of the land on their taxes if they manage forestland as an investment, according to Dan Childs of the Samuel Roberts Noble Foundation.
- Timber Tax: Holding Period Requirements
- IRS.gov; Forest Activities Schedule; December 2005
- Timber Tax: Timber Sales and Income
- The REI Brain; Capital Gains Tax Rates – State by State; October 2007
- Oblivious Investor; 2011 Tax Brackets and Standard Deduction Amounts; December 2010
- The Samuel Roberts Noble Foundation; Tax Considerations When Buying or Selling a Farm; Dan Childs; March 2002