MICHIGAN FORESTS FOREVER TEACHERS GUIDE

TIMBER SALE INCOME AND FEDERAL INCOME TAXES

A word or two about timber sale income effects on federal income taxes is important.  However, a qualified tax preparer should be consulted to address an actual timber sale, as there are many variables to consider.  When a person receives income, they must pay taxes on that income.  Timber sale income can easily be in the tens of thousands of dollars.  Following Internal Revenue Service guidelines, private forestowners can often substantially reduce their federal income tax burden.  There are three ways to do this.

1.  Deduct applicable "basis" from the gross timber sale income.
2.  Consider all other eligible deductions.
3.  File timber sale income under capital gains.

Basis Deductions

The "basis" is a common accounting term which, in this case, means the monetary value of the timber at the time the timber was acquired.  Land values are separate from timber values.   If 50 percent of the timber is harvested, then 50 percent of the basis can be deducted.  If all of the timber is harvested, then 100 percent of the basis can be deducted.  When timber has been owned for more than about 15 years, the basis value is sometimes rather insignificant.

Other Deductions

Most expenses that a forestowner might incur related to a timber sale can be deducted from the gross income.  Survey costs, trail construction, consultant fees, timber marking costs, lawyer fees, and advertising and promotion costs are examples of some of the items that may be eligible.  Claims must be justifiable and receipts need to be retained. 

Capital Gains

A capital gain is the difference between what was paid for a "real" asset and what it is sold for.  In the case of timber, the monetary value literally grows on trees.  When the timber is sold, a lower tax rate can often be applied to the capital gain.  For forestowners, ownership must be for at least one year prior to the timber sale.  There are other qualifying rules as well, but most forest owners are most likely eligible for capital gains tax rates.  Normally, family incomes (salary and wages) are filed as "ordinary income".  Reported timber sale income as ordinary income should be avoided.

For forestowners, one of the best web resources for timber sales taxation is the National Timber Tax Website.

Return to TOP of Page

	This website was developed and created by Michigan State University Extension for the teachers of the State of Michigan.