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Sub-Section 124, Timber Transactions

Internal Revenue Manual
Specialized Industry Guidelines - Timber
Sub-Section 124, Timber Transactions
Last amended: 6-26-1978

Timber Transactions

(1) An owner of timber may derive income from the timber by cutting, selling or exchanging, or leasing the timber. Each kind of transaction is unique and has special income tax consequences for the owner.

(a) An owner may cut the timber or may engage someone else to cut the timber and derive income by selling the wood or using it for making wood products such as lumber and paper pulp. Any gain or loss realized from sale of the wood or wood products is ordinary gain or loss because the wood or products are held primarily for sale in the ordinary course of business. The owner may, however, elect to treat the cutting of the timber as a sale of the timber and realize long term capital gain on the hypothetical sale.

(b) A sale of timber occurs when an owner conveys to another party, for a lump-sum price, the right to enter the premises, cut down certain designated timber, take possession of the wood and haul it away. The intent of the parties is that the cutting and removal will be accomplished promptly and a termination date consistent with that intent is stated in the instrument of conveyance. An important feature of a timber sale is that the agreed upon price must be paid regardless of whether the timber is actually cut by the purchaser. The purchaser's rights to cutting and removal stop when the termination date is reached.

(c) A timber lease is most generally known as a "pay-as-cut" timber agreement or contract. It is not a sale or exchange of property; consequently, it cannot generate long-term capital gain unless the requirements of IRC 631(b) are met.

(2) Any gain or loss realized upon the sale of standing timber is long-term capital gain or loss only if the timber in the hands of the seller is a capital asset as defined by IRC 1221. If the timber is property used in trade or business as defined by IRC 1231, gain or loss on the sale would be netted with other IRC 1231 gains and losses; and if the gains exceed the losses, the net gain would be long-term capital gain. Generally, this means that if the holding period requirement is satisfied, and if the seller was not holding the timber primarily for sale to customers in the ordinary course of the seller's business, then any gain on the sale is a long-term capital gain.