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Trees and Taxes
Article #325 August 2021
By Bill Cook

Forest ownership involves monetary values.   Those values are taxable.  Learning about forest-related taxes can save money.

     Land has value.  Timber has value.  Land is subject to property taxes.  Timber sales are subject to income taxes. 
     First, the property taxes.
     Michigan has two forestland property tax programs.
     The Qualified Forest Program is administered through the Michigan Department of Agriculture and Rural Development (MDARD).  A forest must be at least 20 acres in size and a forest management plan is required.  The typical tax benefit is usually a net reduction of 16 mils from property taxes.  A large advantage is “capping” the property value with an ownership change.  There are other eligibility and contract factors to consider, too.  This is the more popular of the two Michigan property tax programs among family forestowners. 
     The Commercial Forest Program requires at least forty acres and a management plan.  Additionally, the forestland must be open to public hunting and fishing, via foot traffic only.  Roads can be gated but land cannot be posted.  This feature makes the CF program less popular, but the tax breaks are much greater, a straight $1.30 per acre. 
     Both property tax reduction programs require a commitment to forest management.  It would be legally unwise to enter into one of these contracts with no intention to follow a management plan.  Each program has more information on their respective websites.
     Second, timber sales generate income. 
     That income is taxable by both federal and state governments.  Regarding federal income taxes, there is a set of schedules that can save you thousands of dollars on a timber sale.  Reporting timber sale income as “ordinary income” can be an expensive mistake. 
     There are three major ways to reduce federal income taxes.  The first is to report income as capital gains, rather than ordinary income.  This means, among other things, that you must have owned the trees at least a year before a timber sale.  Do not sell timber during the first year of forest ownership!  There are a couple of capital gains classifications, so work with a tax preparer to help figure out which way is best for you. 
     The second tax reduction category has to do with a calculated “timber basis”.  This is a tax term for the timber value (stumpage) at the time of acquisition, usually a land purchase.  Timber values can be separated from land values.  Many new forestowners don’t think to obtain timber values, but those can be back-calculated by a forester.  When a proportion of timber is harvested, an equal proportion of the timber basis can be deducted from the gross income.  For details on this procedure, find a tax preparer familiar with IRS “Form T”. 
     The third category to reduce income taxes is through deductions for expenses related to the timber sale.  These are items for which you paid cash for services or materials related to the timber sale.  Such things as survey expense and consultant fees are usually eligible deductions.  Work with a tax preparer familiar with timber sales. 
     Lastly, many forestowners are not aware that tree planting costs are eligible for a federal income tax credit.  This is about reforestation, not planting an orchard or Christmas tree farm.  There are annual expense caps and the credits are apportioned (amortized) over an eight-year period.  Again, work with a tax preparer familiar with the program. 
     Owning and managing a woodland necessarily involves taxes.  It may not be a favorite topic among forestowners, but knowing the options can save significant amounts of money. 

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TRAILER- This website was created by a consortium of forestry groups to help streamline information about forestry and coordinate forestry activities designed to benefit the family forest owner and various publics that make up our Michigan citizenry.  This website is maintained by Bill Cook, Retired Michigan State Extension Forester/Biologist.  Direct comments to cookwi@msu.edu or 906-786-1575.