Criteria
Before you begin structuring your timber investment there are three important considerations:
Deductibility of annual management and carrying costs - Because of the long time periods over which costs must be carried, realizing an adequate rate of return on your investment requires that costs be minimized and recovered for tax purposes as soon as allowable.
Capital gains treatment - The long-term nature of timber investments makes it important to minimize the tax liability on any income realized. Capital gains treatment is also important even without a significant differential rate because capital gains are not subject to the self-employment tax. A tax planning opportunity may also result from the fact that capital gains and losses still offset each other.
Intergenerational - Their long term nature also means that planning may need to incorporate at least two and frequently three generations. Clear lines of affordable transfers between generations must be planned. If the tree farm is not transferred in-kind, then the wealth that it represents must be transferred.