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Forest Finance: Aunt Fanny Asks About Timber Taxes

My Aunt Fanny, retired after 30 plus years with a regional community bank, inherited 220 acres of forestland in middle Georgia. Since then, she’s peppered me with questions and seduced me with Mentos in order to get a better understanding of how forest investments work.

We got back into my truck and rode down the woods road. I glanced over at Aunty Fanny in the passenger seat. She opened her black-and-white marbled composition notebook on her lap and ran her finger down the page. Then she looked out the driver side window into the woods and said, “Tell me about taxes.”

“You’ll have to pay some,” I said.

“Nephew,” said Aunt Fanny shaking her head, “any Padawan knows that.”

I laughed and nodded my head. “Forests do provide different kinds of tax incentives to landowners, depending on how you’re set up and where you’re located,” I said.

“You have my attention,” said Aunt Fanny.

“Well, you’ve got reforestation tax credits. You can also qualify for long-term capital gains treatment. And you can participate in different state and federal programs designed for forestry and conservation.”

“Like what?”

“For example, some states, like Georgia, allow forest owners to enroll their forests in conservation programs that reduce annual property taxes,” I said. “If you plan to hold and manage your land for forestry, it can be a good deal.”

Aunt Fanny sat quietly as we rumbled down the graveled road. “Nephew, you’ve worked with a lot of forest owners. What kinds of mistakes do people make when it comes to taxes?”

“Number one is that they overpay. They pay more in taxes than they probably need to,” I said.

“Taxes are complicated, Nephew,” said Aunt Fanny.

“They are complicated, but not THAT complicated,” I said. “If my clients do nothing else, I tell them to know their basis, which is what you’ve got invested in the timber. Keep a file with all of the receipts and contracts and documentation. And then, before tax season, hire, or at least talk to, an accountant who understands timber well enough to provide some guidance.”

“In other words, stay organized,” said Aunt Fanny, nodding her head.

“Exactly,” I said. “And your accountant will thank you. You don’t want to lose the proof you need for the IRS that shows you are managing your forest as a business or investment.”

“Why does that matter?” asked Aunt Fanny.

“Well, the IRS cares about the ‘nature of your ownership,’” I said, making quotes in the air with my fingers. “If you own a forest, first and foremost, for recreation, then the IRS would view your forest as a ‘personal use property’ rather than as an investment for profit.”

“Nephew, profit and pleasure do not seem like conflicting goals!” said Aunty Fanny.

“No, you’re right,” I said. “However, the distinction has tax consequences. So staying organized will help ensure you only pay what’s required, and not a penny more.”

“There’s a lot to know here as a forest owner, it sounds like,” said Aunt Fanny.

“There are good resources,” I said. “I always recommend the website www.timbertax.org which has about everything you need in one place, including good materials published by the USDA Forest Service.”

“I’ll check it out,” said Aunt Fanny, writing in her composition notebook.

“At the end of the day, we want to pay as little as possible under the law,” I said. “A wise woman once told me, ‘avoiding guilt is easy. Don’t cheat on your spouse, your expense report or your taxes.’”

“Good memory, Nephew,” said Aunt Fanny.

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