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Manage timber sale for maximum tax benefits

People spend a lot of time and money trying to keep their tax burden as low as possible, but when it comes to timber sales, many Mississippians pay too much in taxes.

Debbie Gaddis, assistant Extension professor of forestry at Mississippi State University, said proper record keeping and management can lower tax bills by allowing timber owners to take advantage of special tax programs available to them.

“Plan your management strategies around tax incentives to make the maximum return on your investment,” Gaddis said. “Most people pay too much for taxes because they don't know what special tax programs are available for forestry or they don't keep the proper records.”

Gaddis said a common error timber owners make is failing to establish a basis value of the timber when they first obtain land.

“Whether the land is bought or inherited, owners need to establish the initial value,” Gaddis said. “When you sell the timber, you subtract this basis value from the proceeds to determine the taxable income on the sale.”

A basis value must be determined when land is bought or inherited. Land that is given away retains the giver's basis. Gaddis said future changes in the estate tax law will affect this in upcoming years. Congress also is expected to make additional changes in the next few years.

How timber is sold can determine whether certain tax benefits are available. Capital gains tax paid on timber profits is usually a lower rate than individuals pay in their income tax bracket. Most capital gains taxes are paid at 20 percent, but depending on the situation can be taxed at 8, 10, 18 or 20 percent.

Gaddis said a second major reason why timber owners pay too much in taxes is because they don't take advantage of tax breaks on replanting.

“Reforestation is the biggest expense most landowners face with timber management, but state and federal tax breaks can cut this cost by up to 60 percent,” Gaddis said.

Keep careful records to manage the tax burden of timber sales.

While it is possible for a landowner to navigate the financial and legal maze alone, Gaddis said an accountant knowledgeable in timber taxation is very helpful.

“An accountant is like a forestry consultant. If you're not willing to put in the time to learn the system thoroughly, then you need to hire somebody to do it for you,” Gaddis said. “It's best to surround yourself with a good forest management team.

Gaddis recommended that each person involved in timber sales, even in a small way, get a copy of the U.S. Department of Agriculture's Agricultural Handbook 718 titled Forest Landowners' Guide to the Federal Income Tax.

This comprehensive guide is available from the Extension Service and details tax law, recordkeeping and more.

Another resource for landowners is timber tax fundamentals short courses offered annually across Mississippi by the Extension Service. The classes cost $25 and are designed for private landowners, consulting foresters and others involved in the timber industry.

Bonnie Coblentz writes for Mississippi State University Ag Communications.

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