Logging wooded acerage, taxes owed?

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SpringMan
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Logging wooded acerage, taxes owed?

Post by SpringMan »

We have been contacted with an offer to log our wooded property. They are drawing up a contract for us to sign. Is the money received subject to income tax? We are essentially selling something we already own and it is a renewable resource. 20 years ago we had logged this property and I reported it as income in the other category on form 1040. I don't think I had to do that. Any thoughts?
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Trev H
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Hey Springman...

Post by Trev H »

A quick online search and I found the site below.

Looks like some decent information on the subject.

http://www.timbertax.org/

PS... I own 220 acres of Timberland in Tennessee which my Grandfather logged in 1979... it is Timber Rich now so I to have questions along the same lines.

Trev H
JDCPAEsq
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Taxable

Post by JDCPAEsq »

The sale of timber is generally taxable as ordinary income, but in some cases may be eligible for capital gain treatment. Be sure to discuss your personal situation with a CPA.
John
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dm200
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While there may be

Post by dm200 »

a lot of details about calculating the tax, what might be deductible, etc. -

The general idea is that this is income on which you owe income taxes. What in the world makes you think this would not be taxed? Or that taxing this (while taxing income to other folks) is not fair or correct?
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SpringMan
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Post by SpringMan »

dm200,
There is a case to be made that this is capital gains not ordinary income. I own the logs right now. 20 years ago when it was logged, any tree less than 18 inches in diameter was not harvested. Those trees not harvested had some value, that could be the basis. The difference between that and what I sell those trees for now, should be long term capital gains. Real estate when sold is generally treated this way, as cap gains. Personal property that I already own is not taxed in general. If I sell my car, is that considered income? I was not sure how logs should be handled so I posted the question.

Your comment about what in the world makes me think this should not be taxed presumes that I think logs should be taxed at all, never did I say that. When you extrapolate this to imply that I think I deserve special treatment from other people with respect to income tax is out of line on your part.
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Alex Frakt
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Post by Alex Frakt »

I'd follow JDCPA's advice and run this by an accountant. Although feedback here can certainly be a help in understanding the basic issues and questions that should be asked, generally speaking you wouldn't want to rely on anonymous advice for such a highly specific tax issue.
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Post by SpringMan »

Alex,
I agree, any feedback, although appreciated would be taken with a grain of salt. I do my own taxes and don't use an accountant but would never rely solely on anonymous advice from a forum. Although this forum has generally accurate advice. My adjacent neighbors are also logging theirs. I can discuss this with them and the commercial forester that drew up the contract.
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Post by JDCPAEsq »

SpringMan wrote:dm200,
There is a case to be made that this is capital gains not ordinary income. I own the logs right now. 20 years ago when it was logged, any tree less than 18 inches in diameter was not harvested. Those trees not harvested had some value, that could be the basis. The difference between that and what I sell those trees for now, should be long term capital gains. Real estate when sold is generally treated this way, as cap gains. Personal property that I already own is not taxed in general. If I sell my car, is that considered income? I was not sure how logs should be handled so I posted the question.
I'm afraid you're inventing tax law out of whole cloth. The timber is not a capital asset and therefore has no basis. You are not selling real estate. Yes, sale of personal property including your car if sold at a gain is fully taxable.
John
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SpringMan
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Post by SpringMan »

John,
You are correct in what you say about my inventing tax law but I admitted I did not know how it should be handled. Your first post said sometimes it is eligible for capital gains treatment. Maybe logs are treated more like a farmer's crop and then treating the sale it as ordinary income seems right?
Thanks for your response.
Regards,
Best Wishes, SpringMan
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stratton
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Post by stratton »

There appear to be special tax laws on the books for timber.

You might take a look at the Pope Resources (POPEZ) MLP tax considerations. Particularly:
Taxation of Timber Sales
A core business of the Partnership is the sale of timber or timber products located on its properties. These sales may occur in one of two ways: (i) sales of harvested timber, in which the Partnership hires a logger to log specific trees or tracts and then sells the resulting forest products, or (ii) sales of “cutting rights”, whereby the buyers purchase only the standing timber that they harvest and pay for it as it is cut. The federal income taxation of these alternative forms of timber sales is summarized below.
You're not an MLP, but the link does discuss specific timber taxes.

Adding new section:
If, instead of engaging in timber harvesting activities, the Partnership sells cutting rights, then the sales will be structured to fall within Code Section 631(b), under which income from the disposal of timber held by an owner for more than one year pursuant to a contract by which the owner retains an "economic interest" in the timber is treated as capital gain. The central requirement of a retained economic interest generally is satisfied if the contract specifies that the buyer acquires only the timber that it cuts. Under applicable Treasury Regulations, any net income from the sale of cutting rights qualifying under Code Section 631(b) will be treated as gain derived from property used in a trade or business, the net income from which is treated as long-term capital gain under Code Section 1231.
This is not tax advice and you should see the appropriate tax expert to consult about your specific situation.

Paul
Last edited by stratton on Sat Nov 10, 2007 6:29 pm, edited 1 time in total.
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Post by Alex Frakt »

I feel JDCPA's frustration here. Specific advice requires knowledge of not only the tax law, but a detailed discussion of your particular situation.

My wife is an immigration lawyer (I manage her law firm). Every week we have people coming in who are in deportation or who have lost their opportunity for a green card because they relied on advice that was completely wrong or was correct on its face, but did not apply to their situation. These are families being torn apart or having to shell out thousands to fix problems that could have been avoided if they had just had the sense to pay a specialist $100 for a consultation or a few hundred to handle the whole thing.

Now screwing up your taxes isn't going to end up with you being led in handcuffs to the next plane out to Tblisi, but the principle still applies. It's a good idea to pay a little now to get professional advice that will help you avoid potentially large future problems.
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stratton
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Post by stratton »

Alex Frakt wrote:I feel JDCPA's frustration here. Specific advice requires knowledge of not only the tax law, but a detailed discussion of your particular situation.
Seconded. Maybe trying to find someone who specializes in timber might be good too.

Paul
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SpringMan
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Post by SpringMan »

I should note that we are not talking about big money here, slightly less than 10k, some which will be this year and some next year. I won't get penalized by the IRS, if I count this as ordinary income for tax. This is what I did in 1988, the first time it was logged. Our tax bracket is only 15%, as I am retired. My guess is that if I pursue this with lawyers and accountants their fees would wipe out any tax savings.
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Best Wishes, SpringMan
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tetractys
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Post by tetractys »

Definitely a question for your local tax district and for the IRS. I wouldn't fool around with this question on this board--to some it might appear like your looking for a loop hole, which of course would be a ridiculous assumption!

All the best, Tet
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Post by SpringMan »

Allegedly when W. C. Fields was on his death bed, he was observed reading the Bible. When asked about this, he responded that he was looking for a loop hole. Those that might think I am looking for a loop hole, rest assured that I am not looking for a loop hole. I will call it ordinary income and let it go at that.
Thanks to all that responded.
Best Wishes, SpringMan
deblacksmith
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Post by deblacksmith »

I suggest that you talk with your local state forestry department and / or the local county argicultural agent. These folks deal with these subjects all of the time and can lead you in the right direction. In my case, I could have taken an income loss for pine beetle kill against other income – but only up to the "bases", I paid for the timberland I hold in western NC.

I think you are dealing with a capital gain.

Dave,
Brasstown, NC
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Post by JDCPAEsq »

deblacksmith wrote:I think you are dealing with a capital gain.

Dave,
Brasstown, NC
Wishful thinking, no more than the farmer's sale of corn is a capital gain.
John
earlyout
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Try Fairmark

Post by earlyout »

Springman,

If you want to pursue anonymous opinions, you might want to post your question on the Fairmark forum. There are some failry savvy tax people there that may give you some additional input.

EO
darko
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Post by darko »

SpringMan wrote:If I sell my car, is that considered income?
If you sell you car for gain, you should pay capital gain tax. If you sell for loss, you can't deduct it. (Reference: IRS publication 17, chapter 14, Capital Gains and Losses, Personal Use Property.)
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Post by alvinsch »

If you want to try to understand it on your own, you might want to start by wading through IRS Pub 544, "Sales and other disposition of assets" and go to page 23 or search for timber.

http://www.irs.gov/pub/irs-pdf/p544.pdf
Outright sales of timber after 2004. Outright sales of timber by landowners qualify for capital gains treatment after 2004. The new rules are similar to certain disposals of timber under a contract with a retained economic interest (defined below). However, the rules differ for the date of disposal, as discussed below.
- Al
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Post by skywolf »

A good place to start is http://www.timbertax.org/

I sold some timber on property I own. My accountant treated it as a capital gain. I had owned the property for several years. If you have owned it for more than a year you will probably be able to treat the sale of the timber as capital gains.

Part of the asset value of purchased land is the economic value of the property (water, timber, minerals, etc....).
roundrock
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Timber

Post by roundrock »

I have been involved in two timber sales. Both were lump sum on property owned for more than a year. Gross reciepts were in neighborhood of 100k. CPA determined sale met all the requirements for treatment as capital gains. I know another person who inherited some land and sold 187K worth of timber. They did not consult a tax professional and the timber was cut prior to being held for a year. They had to pay ordinary income tax rates on it. This is definitely a question for your CPA.
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SpringMan
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Post by SpringMan »

Thanks for the all responses and the links, they are very helpful.
Regards,
Best Wishes, SpringMan
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