Structuring Ownership
"Structure" refers to how you set up your timber investment for legal and tax purposes. How should the property be titled? Should you treat it on your tax return as an investment or a business? If you file as a business should it be a sole proprietorship, or should you form a corporation? Whether you are a new timberland owner or someone who has owned the property for a long time, these are just a few of the questions that should be considered when structuring your timber investment.
Timber is a unique investment with several characteristics that are not typical of normal business situations. These unique characteristics affect how an activity should be structured. The first, and probably most obvious, is the long growth (investment) period. It is quite possible that as the current owner you may never see any returns from your investment. While at the same time you are making annual expenditures for operating and management costs, the annual deduction of which is directly tied to your profit motive. Timber is however, excluded from the uniform capitalization rules. Because of theses long pre-productive periods timber investments tend to be inherently passive in nature, which can have a direct affect on how losses are handled under the passive loss rules.
Timber owners also face a variety of risks that do not affect more conventional investments. Furthermore timber resources are generally exposed to risks for a much longer time period than other forms of investment. Another important consideration is the intergenerational nature of a timber investment. Is the property being held only for speculative purposes, or do you plan to pass the property on? When is it best to start dispersing your wealth? Creating an estate for future generations can be a very complicated process. For a more in depth look at estate planning click here.
In addition to the monetary return that timber investments offer, their are many non-timber benefits that you as a landowner derive such as wildlife, outdoor recreation, clean water, aesthetic beauty and a sense of pride from being a good steward.
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