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Income Recapture Rules

Excluded Cost-Share Payments - If the timber planted or improved by excluded cost-share payments is disposed of before the expiration of 20 years from the receipt of the payments, any gain on the disposal is subject to recapture as ordinary income. If the asset is disposed of within 10 years, the amount recaptured is the lesser of: (1) the amount of the gain from the disposal, or (2) the amount of the cost-share payment excluded. Item (2) is reduced by 10 percent for each year or portion of a year if the disposal occurs between 10 and 19 years. There is no recapture if the asset is held more than 19 years. Recaptured amounts are subject to the rules under Code Sec. 1255 of the Internal Revenue Code and are reported on Form 4797 Part III.

If the gain from the sale is greater than the excluded portion of the cost-share payment the difference between the gain and the excluded portion is reported as a capital gain if it is section 1231 property, and is netted with all other section 1231 transactions for the year.

Expensed and Amortized Reforestation Expenses - If the property is disposed of within 10 years from the time expensed and/or amortized reforestation expenses were deducted, some or all of the gain on the disposition must be recaptured as ordinary income. The amount subject to recapture is the lesser of: (1) the amount of expense and/or amortization taken up to the time of the disposal or, (2) the gain realized on the disposition. There is no recapture, however, if the property is disposed of by gift, and generally recapture may not occur with respect to a transfer at death, like-kind exchanges, involuntary conversions, and certain tax-free transfers such as a transfer to a corporation you control. The amount subject to recapture under Code Sec. 1245 is reported on Form 4797, Part III.