Ownership of timberland provides various benefits, including a place to enjoy outdoor activities with friends and family, current and future financial returns and an inheritance to pass down to future generations.
Whether you plan to or have purchased your land as an investment or you’ve inherited family land, the importance of proper management and the maximization of your land’s potential should never be undervalued.
Owners face a number of financial and tax decisions and considerations, including property management expenses, timber sales and cost basis determination, depreciation and depletion deductions, replanting costs and possibly timber casualty losses.
Though enjoyment of your property and financial profitability are not mutually exclusive, owners should keep in mind the need for an effective timber management strategy paired with an accurate and consistent record keeping system that distinguishes between expenditures that are profit driven and those that are for enjoyment.
Proper planning can identify opportunities to use tax minimizing strategies, which may include tax deferral of gains, adjusting the timing of income and expenses to minimize the tax impact and shifting taxes between family members.
Generally, as no tax is due until your timber is harvested and a gain is recognized, timber growth provides for natural tax deferral over time. Timber appreciation is seen primarily in volume growth and change in tree quality. Volume growth would generally relate to timber to be sold as pulpwood while growth resulting in quality changes would be the maturity of timber from a point of pulpwood grade to saw timber grade.
For purposes of revenue recognition, owners should structure timber management activity, as possible, to allow for the deduction of qualified expenses against non-timber income and for the allowance of all possible deductions against sales proceeds.
If a harvested property has been owned for more than one year, the net sale proceeds may qualify for the more advantageous long-term capital gain tax rates. Another strategy for highly appreciated timber might be to attempt the deferral of income recognition until retirement years when your effective tax brackets may be generally lower.
Owners who don’t necessarily hold their land as an investment may not appreciate the hedging qualities of their timber holdings in overall financial planning. As a living and growing asset, most timber stands can be harvested up to 5 years before or after the most economically favorable stand age with a minimum amount of potential revenue lost.
This may provide flexibility in avoiding weak timber markets, profit taking in strong timber markets, supplementing income in periods of declining financial markets or business operations and, again, minimizing the effect of taxes from sales.
As a renewable resource, timber often can provide funds to meet estate tax liabilities, which otherwise would require the liquidation of nonrenewable assets.
A forester can provide input on the optimal timing of timber harvests given certain assumptions about costs and returns while your CPA can help with tax planning. Keeping an open channel with your CPA and being proactive when circumstances change will help ensure that you are working collectively toward reaching your financial objectives.
Michael Hobbs is a CPA and a member of the audit department at Hancock Askew & Co., LLP. He can be reached at 912-234-8243 or mhobbs@hancockaskew.com.