handling cutting contracts on timber

[purplish2]

I need more info on how to handle income from cutting timber from the farmer prospective. Had a cutting contract and has held the land under 1 year. Does the time held have a affect on how to handle the income?

[Koss]

Timber

This website is very good:

http://www.timbertax.org/

And this publication is very informative:

http://www.timbertax.org/developments/Federal%20Income%20Tax%20on%20Timber-%20A%20Quick%20Guide%20for%20Woodland%20Owners.pdf

BMK

[Nashville]

Answer some questions

I need more info on how to handle income from cutting timber from the farmer prospective. Had a cutting contract and has held the land under 1 year. Does the time held have a affect on how to handle the income?

Owning the timber less than a year eliminates long-term capital gain treatment. Might not even be capital gains at all.

Why did farmer buy the land? Was it for timber? Has he launched a timber operation, or is he just cutting timber because it needs cutting (having just bought the farm)? All the difference in the world.

If he plans to continue a timber operation, the timber revenue and expenses go on a Schedule F just like corn, soybeans, cattle, etc.

If he only cuts timber because it is "ready" and won't cut again for several years, it is a capital gain. Short-term because of owning less than a year.

In either case, there is a science involved if there is any portion of the land purchase price which can be attributed to "standing timber". The science can be complex with a number of calculations and might involve the opinion of a professional forester. It becomes easy if there was an appraisal of timber value prior to buying the farm.

[purplish2]

Owning the timber less than a year eliminates long-term capital gain treatment. Might not even be capital gains at all.

Why did farmer buy the land? Was it for timber? Has he launched a timber operation, or is he just cutting timber because it needs cutting (having just bought the farm)? All the difference in the world.

If he plans to continue a timber operation, the timber revenue and expenses go on a Schedule F just like corn, soybeans, cattle, etc.

If he only cuts timber because it is "ready" and won't cut again for several years, it is a capital gain. Short-term because of owning less than a year.

In either case, there is a science involved if there is any portion of the land purchase price which can be attributed to "standing timber". The science can be complex with a number of calculations and might involve the opinion of a professional forester. It becomes easy if there was an appraisal of timber value prior to buying the farm.

It is inherited property and it is mature and ready to cut. Plans on replanting on 10 acres of the 17 acre place. Running cattle on the rest Can you take it off the basis of the property?

[Nashville]

Basis reduction

It is inherited property and it is mature and ready to cut. Plans on replanting on 10 acres of the 17 acre place. Running cattle on the rest Can you take it off the basis of the property?

You can deduct a reduction in the basis of the property, IF the basis included a value for the standing timber itself. Sounds like a long-term capital gain after all because
i) He is deemed as owning for more than a year if he inherited the property.
ii) Having only 10 acres in timber leaves little hope of a continual year-after-year harvest.

If there was no separate appraisal for the standing timber, then it will be difficult to get one. The links in the foregoing thread can show how a forester would appraise the timber. You can always assume the current selling price to be a somewhat accurate appraisal if the acquisition occurred less than a year, it would probably be reasonable. If you want a professional appraiser such as a forester, it might be cheaper just to pay the tax, especially since it is long-term capital gain.