Need advice on small timber sale - resisting the walnut fever.

[Jeff]

Honestly, I think these guys are wrong on this. We need to get Ron Scott to weigh in on this since he is pretty well versed,  because I am sure there is something in Michigan that keeps you from buying land up and then logging it off, selling the Timber Tax free.

[SwampDonkey]

I'd have to agree Jeff. Seems to be something being over looked somewhere.

[Ron Scott]

In the same vein as what Ron said, if you recently bought the land and timber, then the cost basis that you have in the timber will be about the same as the market value of the timber since only a short time has passed and timber prices have not risen in the last while.  So, you would likely owe no Federal or State income taxes on the sale of the timber.  You do need to get the breakdown of value of the land and timber established. This is called the Basis.  This is used for establishing your depletion rates on your timber to use as the cost basis for future sales.  Don't overlook this and it is smart business and will save you a whack of tax $.  Getting this appraisal done will at the same time give you an idea of the potential timber value in the timber sale that you are considering, so you can kill two birds with one stone.

Good advice by WDH.

You need to have the timber cost basis for the property established by a professional forester to establish a depletion account for the timber soon after pruchase of the property. The quantity and value of the timber sold from the property relative to your timber depletion account established at the time of purchase of the property will determine the amount of taxes if any that must be paid.

If you have not had your timber basis established for the propery when purchased then you must pay the capital gains tax rate on the timber value sold. The timber purchaser (logger) must issue you a 1099 which records the added income that you must report to the IRS for tax purposes. Check with your tax accountant to report the timber sale on the proper Schedule T Form.

If you have timber on your property, it is always best to have the timber basis established for your property when purchased to help avoid the larger tax payments on your initial timber sales until you exceed the values of your depletion account.

[1woodguy]

Now that's some very helpful information
The ol 1099 snuck up and bit me in the past
One time didn't have the money left for taxes, and got ate up interest and penaltys on top of the taxes
That was 30 plus years ago but I never forgot :D

[WDH]

The thing about depletion is that trees grow in volume.  Say that you bought land, and the timber value was 1000 tons that was valued at $1000 at the time of purchase.  Your cost basis in the timber is $1.00/ton.  Lets say that you grow the timber for 10 years and the volume increases to 2000 tons.  Your cost basis of $1000 stays the same, so now your cost in the timber is $1000 divided by 2000 tons or $.50/ton.  If you harvest the timber and sell it for $2.00/ton, you can deduct $.50/ton of depletion from the sale and then owe taxes on $1.50.  The depletion account is not static.  The rate changes as the timber volume changes.

Same thing when you plant trees.  All the cost of the establishment represents the cost basis on the timber.  When the trees are big enough to harvest, the volume is determined and divided by the $ that you spent to establish the trees.  This becomes your cost basis or depletion rate for the timber.  Money that you spent to grow and maintain the trees that does not qualify as deductible management expense can be added to the depletion account.

[Okrafarmer]

All true and good info, WHD, but an interesting side thought to all that is, that if your establishment costs are a certain amount, say $1,000, then thirty years later, the same establishment practice might cost $10,000, and so inflation would rob you of some very real investment when it came time for tax deduction. (If I'm understanding correctly).

[Ron Wenrich]

You also have to remember that you're separating the land and timber basis.  If you buy property for $100k and sell timber off of it for $20k, you only have $80k left when it comes time to sell your land. 

[Okrafarmer]

You also have to remember that you're separating the land and timber basis.  If you buy property for $100k and sell timber off of it for $20k, you only have $80k left when it comes time to sell your land.

You mean $80,000 you can sell without having to pay capitol gains?

[WDH]

You can deduct the $80,000 as a cost, and that reduces the taxable amount.

[Okrafarmer]

You can deduct the $80,000 as a cost, and that reduces the taxable amount.

Ok, that makes sense. In which case, if you sell it long into the future, the fact that you bought that 1,000 acres for $10 an acre back in 1950, for $10,000, then sold $2,000 off it in 1951, $10,000 off it in 1962, and $100,000 off it in 1985, $200,000 off it in 2007, means you have to pay taxes on everything but the first $10,000.  :-\

Blasted inflation.

[WDH]

Yes, but the timber is separated from the land for tax purposes.  There should be a separate cost basis for each.

[Okrafarmer]

Seems like in reality, even if they are separate on paper, the two combined are a different value than the sum of their parts.

[Jeff]

Depending on the location or situation land is not always worth less with the timber removed.

[hollywoodmfg]

One county near me decided to tax land owners on timber value till they seen that people started clear cutting to avoid more taxes. Also a thing to keep in mind when u look at loggers previous jobs he may have been doing what that landowner wanted not what u want. I have cut as a forester would want and I have striped a woods because they wanted every last dime . Gotta work rite. so make sure land owner was happy compared to what he wanted. I think most loggers will try to work for the landowner.   

[Okrafarmer]

Depending on the location or situation land is not always worth less with the timber removed.

Sometimes it is worth more.
Around here, in the hey-day of expansion in the mid '90's, when they put the BMW plant in here, and many other companies were expanding, it was routine to put in a new grocery store or Walmart or strip mall, and they would bring in an excavator (called a track-hoe around here) and a crawler loader, and simply bulldoze all the trees into a pile in the middle of the lot and torch them, big oaks and all.

[deezler]

Hi all,

Figured I owed the forum an update on this.  Thanks again for everyone's advice.

Just had 31 Walnuts taken out, I forget the total est. bd-ft.  I did not use a forester, since none seemed very interested in working with me.  I talked more with the one timber company that seems to specialize in Walnuts, and they made me feel good about going forward.  Previous references checked out, and we listed a lot of details on the contract to make me more confident.

The veneer logs are still laid out on the landing, they sold for an even $20k.  A big ol' pile of saw grade remainders still waiting to be sold, hope to get a couple thou more from those.  Unfortunately we got 6" of slush on Tuesday night and everything is all slopped up now.

They brought their smallest skidder (JD 540), but it still scraped a few trees bark off.  Almost all trees were topped before felling, so almost no nearby trees were damaged.  All the tops are still laying out in the woods, so I have a lot of work to do cleaning that up.  But overall I am pretty happy with how the job went.  Getting paid $20k for simply signing a contract is pretty rad.  My logger says I shouldn't owe any tax on it, too, but I am still preparing myself for 15% capital gains just in case.

A few pics:

Here's about the worst view of the woods I came across.
https://forestryforum.com/gallery/displayimage.php?pid=131283#top_display_media

Tree topped:
https://forestryforum.com/gallery/displayimage.php?pid=131282#top_display_media

Pile of the saw grade:
https://forestryforum.com/gallery/displayimage.php?pid=131284#top_display_media

Veneer grain:
https://forestryforum.com/gallery/displayimage.php?pid=131285#top_display_media

If anyone has any questions or wants to see some more pics, lemme know.

[deezler]

I really can't drop in a --Photos MUST be in the Forestry Forum gallery!!!!!-- pic link?

The photo gallery on this site doesn't make any sense.  It should be pretty simple to allow embedded pics in my post, but this forum makes me feel like an idiot.  Haha.

Edit: Wow, I can't even type the word  p h o t o b u c k e t.  That's just dumb.  :P

[thecfarm]

This will explain all and do all. READ and watch  the whole thing.

https://forestryforum.com/board/index.php/topic,61788.0.html

It all does make since. If any photos are put in the FF gallery they will always be here for others to enjoy. No dreaded red"X" on this site. No broken links.

I'm glad it all worked out for you.

[Sprucegum]

Thanks for the update  8)

From a woodworker's point of view there is still lots of good wood laying on the ground out there. Don't burn it all before you check with your local hobby groups. = easy money  ;)

[deezler]

oh yeah!  I definitely plan to first harvest all the straighter pieces over 6 to 8" diameter that could make good boards or beams.  I don't have a mill yet, but was thinking of buying an alaskan/granberg rig to get me started.

[GAB]

If there's a wood turner's group in the area you might consider contacting them as many like crotch wood for it's grain.  The larger pieces might be good for bowls and the smaller stuff for pens and other small turnings.  Another option could be to allow high schoolers in the wood working classes an opportunity to pick up some educational material.
Just a suggestion.
Gerald

[WDH]

Oh you definitely will owe the IRS for taxes, that is for certain. 

[SwampDonkey]

I was going to say, that you'll likely see that $20,000 dwindle a tidy sum. Sometimes loggers aren't great tax advisers I'm afraid. ;)

[Okrafarmer]

Then again, if they never pay any taxes themselves, maybe they know something. . . .

Just kidding. I've known some like that.

[WDH]

In many states there is a severance tax due on timber.  In Georgia, it is the county millage rate times the value of the sale.  Then, the Federal government and the State government will get their share over and beyond what the county gets.  The buyer is likely required to fill out a IRS Form 1099 which will report the sale to the Feds, and they will be happy to collect some taxes from you.