Tax Information on Timber Investment
Payments from timber sales are made on Form 1099-S if the amount is over $600. Box 3 of the 1099-S should include the phrase, “Lump-sum timber payment.”
The sale of standing timber that is held as an investment is taxes as a capital gain. Use Form 1040 Schedule D and Form 8949 to report gains from the sale of standing timber held as an investment. It is deemed to be an “investment” and not a “business” because the profit motive is an appreciation in value, not active management on a more regular and continuous basis. Determine the amount of capital gains by subtracting the timber’s adjusted basis through depletion and selling expenses from the gross sale proceeds.
Timber sale expenses include advertising, timber cruising, overnight travel, marking for harvesting, scaling, and legal fees. To support timber sale expense deductions, maintain receipts, canceled checks, bank statements, financial statements, invoices, mill-scale slips, closing statements, 1099-S forms (reporting gross sale proceeds paid to you for the sale of your timber), and sales contracts.
The basis of purchased timber includes the purchase price of the timber and other acquisition costs. Document your timber basis in premerchantable timber. Include timber volume and value in the basis. The original basis of timber may change over time through adjustments, such as new purchase, timber growth, timber loss, or sale. The adjusted basis of timber is used to determine the gains or losses of timber sale.
Depletion refers to the cutting of standing timber. Depletion unit=adjusted basis/total timber volume. The depletion unit is usually measured in dollars per unit of timber. Depletion deduction=depletion unit x timber volume harvested. Depletion allows owners to recover timber basis at the time of timber sale. The amount of depletion is subtracted from the timber sale proceeds to compute the taxable gain or loss. Depletion deductions are allowed to the owner of an economic interest in standing timber. The timber owners look for the return of capital invested.
IRS Form T (Timber), Forest Activities Schedule, is a form on timber transactions. It can be part of your timber tax records even if you are not required to file it. Timber acquisition and sale can be recorded on Form T. Filing of Form T is required if claiming a deduction for timber depletion, but there’s an exception to that requirement if a taxpayer makes only occasional timber sales (one or two sales every three or four years). However, adequate records must still be maintained, and it’s considered prudent practice to use Form T.
Sources:
USDA Quick Guide: Federal Income Tax on Timber, Fourth Edition, 2012
IRS Instructions for Form T (Timber)
USDA’s Tax Tips for Forest Landowners
The sale of standing timber that is held as an investment is taxes as a capital gain. Use Form 1040 Schedule D and Form 8949 to report gains from the sale of standing timber held as an investment. It is deemed to be an “investment” and not a “business” because the profit motive is an appreciation in value, not active management on a more regular and continuous basis. Determine the amount of capital gains by subtracting the timber’s adjusted basis through depletion and selling expenses from the gross sale proceeds.
Timber sale expenses include advertising, timber cruising, overnight travel, marking for harvesting, scaling, and legal fees. To support timber sale expense deductions, maintain receipts, canceled checks, bank statements, financial statements, invoices, mill-scale slips, closing statements, 1099-S forms (reporting gross sale proceeds paid to you for the sale of your timber), and sales contracts.
The basis of purchased timber includes the purchase price of the timber and other acquisition costs. Document your timber basis in premerchantable timber. Include timber volume and value in the basis. The original basis of timber may change over time through adjustments, such as new purchase, timber growth, timber loss, or sale. The adjusted basis of timber is used to determine the gains or losses of timber sale.
Depletion refers to the cutting of standing timber. Depletion unit=adjusted basis/total timber volume. The depletion unit is usually measured in dollars per unit of timber. Depletion deduction=depletion unit x timber volume harvested. Depletion allows owners to recover timber basis at the time of timber sale. The amount of depletion is subtracted from the timber sale proceeds to compute the taxable gain or loss. Depletion deductions are allowed to the owner of an economic interest in standing timber. The timber owners look for the return of capital invested.
IRS Form T (Timber), Forest Activities Schedule, is a form on timber transactions. It can be part of your timber tax records even if you are not required to file it. Timber acquisition and sale can be recorded on Form T. Filing of Form T is required if claiming a deduction for timber depletion, but there’s an exception to that requirement if a taxpayer makes only occasional timber sales (one or two sales every three or four years). However, adequate records must still be maintained, and it’s considered prudent practice to use Form T.
Sources:
USDA Quick Guide: Federal Income Tax on Timber, Fourth Edition, 2012
IRS Instructions for Form T (Timber)
USDA’s Tax Tips for Forest Landowners
