Many family forest landowners who deduct expenses and report sales income as capital gains income also take the following five actions.
Decide to operate as a business, investment or hobby
If you are taking actions to implement your management goals then you may be in a business. If you are holding the land and timber for resale you may be an investor. You might think of owning forestland simply as part of land-ownership. It is up to you to decide. The Woodland Advisor Class offered occasionally on Income Taxes and Family Forests provides information to help landowners make a decision about how to operate their family forest.
Get, and follow, a current forest management plan
One record that has proven itself useful in an Internal Revenue Service audit is the forest management plan. Plans that include as the main objective the production of timber for future sale provide evidence of operation as a business.
Know the value of your timber at the time you acquired your property
The value of the standing timber at the date it was acquired is part of the capital investment in the forest. The original value of the standing timber is not taxable when the timber is sold. A forestry consultant can determine the value of the standing timber.
Keep a journal
The journal will document the actions taken to protect and manage the forest. For tax purposes the journal should include the following details a) descriptions of the work done, b) the date, c) who did the work, d) how many hours the owner worked, e) the cost involved or income received. Actions related to the management of the forest should also be included.
Get advice from an accountant
The Internal Revenue Service rules and regulations regarding reporting income from timber sales are found in many parts of the IRS code. The Forest Landowners’ Guide to the Federal Income Tax describes many of the parts of the IRS code that apply. Working with an accountant or other tax advisor who is familiar with the code and family forests may save you time and money.
Other useful links:
- Forest landowner’s guide to the federal income tax (PDF)
- Estate planning for forest landowners: What will become of your land?
- National Timber Tax Website