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A word or two about timber sale income affects 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 forest owners 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 deduct 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 forest owner 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 forest owners, 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.


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MSUElogo.tif (16254 bytes) This website was developed and created by Michigan State University Extension for the teachers of the State of Michigan.  The website is maintained by the Delta-Schoolcraft Independent School District in support of the Michigan Forests Forever CD-ROM from the Michigan Forest Resource Alliance.

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