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Sale of Timberland

This section deals with the sale of timberland and any improvements that may have been made, how to calculate the gain (loss), and how to report the sale. In order to determine the gain (loss) from the sale of timberland there are a few important pieces of information that will be required.

The date that you first acquired the timberland and the date the timberland was sold. In order to receive the preferential tax treatment provided by long-term capital gains it is necessary to determine the exact holding period of your timberland. If the holding period does not meet the requirements, then the gain will be a short-term capital gain which is taxed at your marginal rate, but not subject to the self-employment tax. If, however, the holding period has been satisfied then the gain may be taxed at a rate lower than your marginal tax rate.

The primary purpose for holding the timberland: Business, Investment, or Personal use. To determine if the gain (loss) from the sale is to be treated as a capital gain (loss) or an ordinary gain (loss) the primary purpose for which you held the timberland is important. If the timberland was a capital asset in your hands then the proceeds from the sale will be treated as capital gains (losses). Otherwise, the proceeds from the sale will be treated as ordinary income.

For the most part, everything you own and use for personal purposes or investment is a capital asset. Timberland that is held as part of a trade or business is section 1231 property which is netted with all other section 1231 transactions for the year to determine whether the gain (loss) is ordinary or capital. The one exception to the general rule is property held primarily for sale to customers in the ordinary course of a trade or business. Timberland that is held primarily for sale is not section 1231 property and any gain would be treated as ordinary.

The basis of the land, the timber, and any other improvements to the land that were sold. The manner in which the basis in your timber, land, and any other improvements is determined is directly influenced by how the assets were acquired. For a complete explanation on how to determine your basis click here.

Recapture Provisions

Excluded Cost-Share Payments - If any property that was established or improved by excluded cost-share payments is disposed of within 20 years of establishment, part of the gain on the disposal is subject to recapture as ordinary income. If the asset is disposed of within 10 years from when the payments are received, 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. If the property is disposed of between 10 and 19 years the lesser of the two is reduced by 10% for each year, or part of year, up to 19 years. There is no recapture if the asset is held more than 19 years. Recaptured amounts are subject to the rules under Section 1255 of the Code and are reported on Form 4797.

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.

Amortized Reforestation Expenses - If the property is disposed of within 10 years from the time amortized reforestation expenses were taken, 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 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 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 is reported on Form 4797.

Reforestation Investment Credit - If the property is disposed of within 5 years from the time the reforestation investment credit was taken all or part of the investment credit is subject to recapture as ordinary income. The recapture amount is 100% if the property is disposed of before one year, and is reduced by 20% for each year thereafter up to five years. There is no recapture for dispositions after five years. Form 4255 is used to calculate the amount of recapture. Recapture of the investment credit does not apply to a transfer because of death, or a transfer between spouses. For qualified timber property subject to investment credit recapture, increase the basis of the timber by 50% of the recapture tax.

NOTE: If you are subdividing the property to be sold for development there may be restrictions on the capital gains treatment. Please consult with a tax specialist to find out how the rules apply to your situation.

Reporting the proceeds from the sale of Timberland

The gain or loss from sale of timberland can be calculated using Form T, Part III. The net gain or loss from the sale of timberland is reported on Schedule D of Form 1040 and on line 13 of Form 1040. If the timber was held less than one year complete part I of Schedule D. If the timber was held for more than a year complete Part II of Schedule D.