TAXATION and FOREST LAND
Article #115, January 2007
By Bill Cook
It costs money to own land. For many, there are mortgage payments. For almost all, there are property taxes. For those that sell timber, there are taxes on that income.
There are ways to reduce property taxes and income taxes from timber sales. Forest management and timber harvesting are very productive tools in not only achieving ownership objectives, but in also paying off the mortgage. For the savvy forest owner, tax burdens can be significantly reduced.
First, any timber sale income received in 2006 is subject to taxation. Reporting timber sale income as ordinary income (like salaries and wages) on your 1040 form is the easiest route but you'll end up paying a much higher tax. The better route is through capital gains and using the IRS codes specifically designed for timber sales. Get to know Form T. The federal capital gains tax rates are lower. Also, under capital gains, the timber sale income will be exempt from self-employment taxes (e.g. social security). These procedures, alone, can potentially save thousands of dollars.
The gross timber sale income can be reduced through a series of allowable deductions. Dig out those receipts for out-of-pocket expenses associated with the timber sale. You can deduct them from the gross income. Something called "timber basis" can also be used to reduce taxable income. Your basis is the monetary value of the timber at the time of acquisition. A portion of that basis can be deducted from timber sale income based upon the percentage of total wood volume harvested. So, if you harvest half your wood volume; then half the basis value can be deducted from the timber sale income. If the entire forest was harvested, then the entire basis value can be deducted from the timber sale income. Working with a professional forester and tax preparer can fine tune the IRS rules to your best advantage.
Second, property taxes can be significantly reduced by enrolling forested property into programs offered through the State of Michigan. The legislature recognizes the importance of keeping as much forest land as forest, so it has enacted two programs to help accomplish this. The Commercial Forest Program (CFP) has been around in one form or another for decades. The Qualified Forest Program (QFP) is new in 2007. Both programs "buy" sustainable forest management on private land through property tax reductions.
If you're not genuinely interested in forest management, then neither program should be considered.
The CFP was updated for 2007. The program description is available on the DNR website [www.michigan.gov/dnr] in the Private Forest Lands section. For eligible forest property, there's a tax rate of $1.10 per acre with regular nickel increases every five years. The major barrier for many forest owners is the requirement of allowing public access (foot only) for hunting and fishing. The new QFP does not require public access. The tax reduction comes in the form of an exemption from public school taxes.
Both programs require forest management plans, have eligibility rules, application procedures, various fees, and withdrawal penalties. There are also important differences. DNR Service Foresters are good contacts for more information. Many forestry consultants and Conservation Districts have working knowledge of the programs. In the U.P., MSU Extension offices have current information. Make sure that you do your homework.
For lands currently enrolled in the CFP, there is a short penalty-free window to allow conversion to the QFP. The application deadline is the end of September. However, because the QFP is a new program, the administering agencies have yet to finalize the application procedures. For forest owners considering conversion, the QFP may involve a re-assessment of the land. Re-assessments generally result in a higher taxable value and therefore higher taxes.
Forest lands are tremendous assets for a wide range of reasons. Managing them provides more of each of those reasons. Benign neglect may be one of the most damaging options available. Both the federal and state governments recognize the value of forest management and timber production. These policies and programs help forest owners minimize expenses and maximize benefits. They're worth considering.
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Bill Cook is an MSU Extension forester providing educational programming for the entire Upper Peninsula. His office is located at the MSU Upper Peninsula Tree Improvement Center near Escanaba. The Center is the headquarters for three MSU Forestry properties in the U.P., with a combined area of about 8,000 acres. He can be reached at firstname.lastname@example.org or 906-786-1575.
by Bill Cook, Forester/Biologist, Michigan State University Extension, 6005
J Road, Escanaba, MI 49829
906-786-1575 (voice), 906-786-9370 (fax), e-mail: email@example.com
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