Taxes and Estate Planning
Ad Valorem Tax Assessment of Timber Sold
In Georgia, timber is taxed only once during the period of its growth and that is at the time of harvest or sale. Timber is taxed at 100% of its fair market value and includes softwood and hardwood pulpwood, chip-and-saw logs, saw timber, poles, posts and fuel wood. The owner and/or seller, upon receipt of payment under lump-sum, unit price or owner harvests are required to file the appropriate documents in a timely manner. Additional information, filing forms and deadlines may be obtained from the county tax assessor's office in which the timber-sale property is located.
Conservation Use/Agricultural Preferential Assessment
Owners of agricultural land, timberland and environmentally sensitive land may qualify for conservation use or agricultural preferential assessment which means that their property will be assessed at 40% of its current use value or 25% respectively on the agricultural lands fair market value. This normally results in a reduced assessment for properties in these categories.
Passive Loss Rules and Forest Landowner Classifications
There are three classifications applied to forest landowners under passive loss rules:
- Investor
- Passive
- Active participant (materially participating) in a trade or business
As a general rule, you will receive the best tax advantages if you are in the third category of being an active participant or materially participating in your timber business. Being an active participant qualifies management expenses, property taxes, and interest on indebtedness as being fully deductible against income from any source in the year in which they were incurred.
Important facts that need to be noted regarding being materially participating is that, to qualify your timber sale income as capital gains income are, you may dispose of your timber on a lump-sum basis if the timber is a capital asset in the hands of the seller (not held primarily for sale to customers in the ordinary course of a trade or business). Timber sold at a specified rate for each unit of timber actually cut and measured also qualifies for capital gains treatment under the provisions of Section 631 of the Internal Revenue Code and are commonly referred to as pay-as-you-cut or unit price sales.
Tax Advantages – Most of the Information Below Applies To Active Participants
Capital Gains/Self-Employment Taxes*
There are two important reasons to arrange for your timber sale revenue to qualify as capital gains from a tax-reduction viewpoint:
1. One is that on sales of timber that have been held for the required holding period, capital gains are taxed at a maximum rate of 20%. The 2003 Tax Act lowered the 20% and 10% non-corporate capital gain rates to 15% and 5% respectively, effective 5/6/2003. They apply through 12/31/2010; thereafter, the 20% and 10% rates return. For the three years only (2008-2010), the 5% rate is reduced to 0.
2.
The second reason is that capital gains income is not subject to self-employment tax as is ordinary income. Capital gains income does not affect the social security payments of retired persons.
To be qualified for capital gains treatment, any timber purchased by the seller that is sold after 12/31/1997 must have been held in ownership by the taxpayer for longer than one year. There is no holding period for inherited timber. A one year holding also applies to timber received by gift, but the one year includes the time the timber was held by the donor as well as (if needed) the time the timber has been owned by the donee.
Casualty Losses
To qualify for a casualty loss, the loss must occur from an event that has been identifiable, damaging to property and sudden, unexpected or unusual in nature. Should your loss qualify under these conditions your claim of loss cannot exceed your adjusted basis in the property less any insurance or other compensation. Both Southern Pine Beetle infestations and mortality due to drought conditions have been ruled by the I.R.S. to not qualify for casualty deductions. Although such losses may not qualify as a casualty loss they may qualify as an involuntary conversion. To defer any gains realized, you must reinvest the proceeds to purchase qualifying replacement property such as replacement timber sites, the cost of seed, seedlings and replanting or sowing of seed or with certain restrictions, the cost of purchasing controlling stock of a timber corporation.
Cost-Share Payments
Cost-share programs differ in qualifying for exclusion from gross income and you should check with you forestry tax accountant as to the status of your specific program payments being received. Generally, taxpayers will benefit from excluding cost-share payments if they qualify under the guidelines established.
Estimated Tax Payments
As a general rule, you are required to make estimated tax payments for the tax year if you expect to owe at least $1,000 in tax after subtracting your withholding and credits, and you expect your withholding and credits to be less than the smaller of:
- 90% of the tax to be shown on your current year's tax return, or
- 100% of the tax shown on your last year's tax return. Your last year's tax return must cover all 12 months.
Estimated tax payment due dates are generally the 15th of the month following the end of the calendar quarter in which the income was received (i.e., the due date for income received in the January through March quarter is April 15th). Timberland owners who sell timber within one or more tax years should be aware of estimated tax payment requirements. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.
Reforestation Tax Deduction and Amortization*
The deduction and amortization
of qualified reforestation expenses during the tax year are important advantage options available to forest landowners and should not be overlooked in those years in which reforestation expenses are incurred. A maximum of $10,000 in qualified reforestation cost, may be deducted for each eligible (must have a unique stand qualifier) timber property, on the tax return for the year in which the expenses were incurred. All eligible reforestation costs exceeding $10,000 per year, for each eligible timber property, without limit, may be amortized over eight tax years.
At the end of the amortization period the basis for the stand(s) identified within the timber property will be $0. Elect to use this provision on Form 4562 (Part IV) or on Part IV of Form T, on a timely filed return (including extensions). "Passive" category timberland owners may not be eligible for the reforestation deduction and amortization election.
Basic Steps of Estate Planning
Planning your estate prior to your (or your spouse's) death is optional. A plan prepared by you and your spouse in a timely manner will distribute your property and assets as you want them to be distributed. If you fail to prepare an estate plan the state of Georgia will divide your assets for you according to state law. To prepare a plan, it is normally recommended that you follow these steps:
- Take time to prepare an inventory of your assets and their current value. Project as best you can the growth of assets and liabilities as well as changes in the family situation to the best of your ability.
- Decide upon the objectives of your estate plan to include retirement income, support of a remaining spouse, needs of children, charitable gifts, minimizing tax liability, charitable contributions and other items that are important to you and your spouse.
- Obtain professional help in choosing an attorney who is knowledgeable in estate planning techniques, estate tax laws and the tax implications of the laws and techniques. Other professionals who may provide assistance in the process are your consulting forester, C.P.A., bank trust officer, certified financial planner and insurance representative.
- Select the best plan that provides for your objectives. The plan options may not provide for everything that your want, so select the best one available to you.
- Review your estate plan periodically and evaluate for needed plan revisions.
- Begin the estate planning process now.
Resources
Casualty Loss and Involuntary Conversions Applicable to Timberland Owners (pdf) - GFC
Tax Tips for Forest Landowners, USDA Forest Service - 2007 2006 2005
Internal Revenue Service
National Timber Tax Website
USDA Forest Service - Cooperative Forestry
*Credits:
Timber and Federal Income Tax, by Harry L. Haney, Jr., Ph.D. and William C. Siegel, J.D., Copyright@2007, Revised 11/3/07.
Tax Tips for Forest Landowners for the 2007 Tax Year, by Linda Wang, Forest Taxation Specialist and John L. Greene, Research Forester, Southern Research Station.
