Austin’s Outlook

Capital Gains

Austin Carroll, Consulting Forester

Since tax season is rapidly approaching, it is a good opportunity to talk about capital gains taxes. A capital gains tax is realized on any capital asset, including the sale of timber. The following is a simplified explanation of capital gains; there are many other variables that are not discussed that can influence an individual’s tax exposure. This is only meant to give landowners a general introduction to capital gains taxation. Landowners should consult an accountant to discuss their particular situation.

Before we get in to capital gains, we need to first discuss determining a tax basis. In order for landowners to determine their tax exposure on selling timber, a tax basis must first be established. A tax basis is typically the amount paid to acquire an asset, including administrative costs and other expenditures. No matter how much timber is sold, landowners are not required to pay capital gains tax until the proceeds from the sale of timber exceeds their tax basis. Therefore, determining your tax basis is extremely important since this will establish a threshold on the amount of proceeds from a timber sale that a landowner would be required to pay capital gains tax. Even if a tax basis was not established when a landowner purchased land, an appraisal can still be obtained by essentially growing the forest backwards and applying appropriate prices based on the timber market when the property was acquired.

For a simple example, if I buy 100 shares of stock at $1 per share, my tax basis would be $100 (100 shares times $1/share).  If I sell all 100 shares at $2 per share, I would pay taxes on the $100 in gains (100 shares at $2/share = $200 minus my $100 tax basis). However, if I sold 50 shares at $2 per share ($100), I would have no tax exposure since the proceeds of selling the stock does not exceed my original tax basis. This is obviously grossly oversimplified, but you get the idea.

As it stands today, a landowner who acquired their property less than 1 year (short-term capital gains) prior to selling timber would be taxed as if it were ordinary income, but if the property was acquired more than 1 year (long-term capital gains) prior to selling timber, their taxable capital gains income would be capped at 15%.

2011-2012 Tax Years
Tax Bracket	Short-term Capital Gains	Long-term Capital Gains
10%	10%	0%
15%	15%	0%
25%	25%	15%
28%	28%	15%
33%	33%	15%
35%	35%	15%

Beginning in 2013, the above will no longer be the case for long-term capital gains. Capital gains taxes will revert back to pre-2003 rates of 20% for those above the 15% tax bracket and 10% capital gains tax for those at or below the 15% tax bracket. In addition to the increases in the federal income tax, capital gains on timber could be subject to a 3.8% Medicare tax called the “Unearned Income Medicare Contribution” if income from a timber sale should put a landowner(s) over the threshold of $250,000 for joint return, $125,000 for a married individual filing separately and $200,000 for all others.

So, this begs the question, Should landowners accelerate timber sales to 2012 that are set for 2013 and beyond?

Unfortunately, there is not a simple “yes” or “no” answer. There are many variables to consider for harvest scheduling including market trends, increased volume growth, biological maturity, among others.

If a tract of hardwood timber has reached biological and financial maturity, then accelerating your timber sale may be an option. The hardwood sawtimber market has been drawing much interest from buyers.  Meanwhile, increased tree growth within a stand over a year’s time (depending on the tract size and age) would not be enough to offset an increase in capital gains tax of up to 8.8%.

For landowners with pine sawtimber, an accelerated timber sale will not likely be an option. Selling pine sawtimber in today’s market would likely incur a much greater loss from an abysmal pine market than paying an increased capital gains tax in a stable pine market.

Once again, this is only meant to be a brief introduction to capital gains taxation. There are many other variables that were not discussed.  Be sure to confer with a tax professional before making your timber sale decision.

If you are a landowner interested in exploring your options in timber management email me at austin@tennesseetimber.com, or give me a call at 731-608-2933