Federal Income Tax 

on Timber

A Key to Your Most 

 Frequently Asked Questions

United States

Department of Agriculture

Third Edition

2011

Revised by Linda Wang 

USDA Forest Service

Reviewed by William C. Siegel

Attorney-at-Law

R8-TP 39

Revised November 2011

Forest Service

Southern Region
Federal Income Tax on Timber

A Key to Your Most Frequently Asked Questions

Revised by

Linda Wang, Ph.D.

National Timber Tax Specialist, USDA Forest Service

Reviewed by 

William C. Siegel, J.D.

Attorney, River Ridge, Louisiana

R8-TP 39

Revised November 2011
Disclaimer

This publication is intended to be used solely for educational purposes. The materials contained herein are not legal or accounting 

advice and should not be construed as such. Consult your professional legal or tax advisors for your specific tax situation. Pursuant 

to the IRS Circular 230 rules, any U.S. federal tax advice contained here is not intended or written to be used for the purpose of 

avoiding penalties under federal tax law, or promoting, marketing, or recommending to another party any transaction or matter 

addressed herein.

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disability, and where applicable, sex, marital status, familial status, parental status, religion, sexual orientation, genetic information, political beliefs, reprisal, 

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Independence Avenue, S.W., Washington, D.C. 20250-9410 or call (800) 795-3272 (voice) or (202) 720-6382 (TDD). USDA is an equal opportunity 

provider and employer.
INTRODUCTION

2011 Edition

This publication provides a quick reference on timber tax laws that are important to woodland owners. It presents a concise and 

easy-to-understand explanation of the most commonly asked tax questions. 

The intended audience includes consulting foresters, woodland owners and loggers who need a basic understanding of federal 

income tax rules on the management of woodland property. It is also a valuable resource for tax practitioners: CPAs, tax managers, 

enrolled agents, attorneys, and tax return preparers who seek a quick overview of timber tax rules.

Since the first income tax Form 1040 appeared in 1913, many timber tax provisions have been added to encourage management 

and stewardship of private woodland that are commonly unknown by tax professionals. This publication is prepared to help woodland 

taxpayers and their professional advisors to learn and utilize these tax laws.

Please send any comments on this publication to: lwang@fs.fed.us. 

Linda Wang, USDA Forest Service

Williams Siegel, Attorney-at-Law
Contents

I. Your Woodland Tax Classification................................................................................. 1

1. Personal Property...........................................................................................................................................1

2. Investment (Income-Producing) Property ..................................................................................................2

3. Business Property...........................................................................................................................................3

1) Business or Hobby.....................................................................................................................................3

2) Passive Activity..........................................................................................................................................4

II. Timber Sales.................................................................................................................. 5

1. If Your Woodland Property Is an Investment............................................................................................5

2. If Your Woodland Property Is a Business ...................................................................................................6

1) Sale of Standing Timber (Section 631(b)).................................................................................................6

2) Sale of Cut Timber (Section 631(a)) .........................................................................................................7

3. Farming and Timber......................................................................................................................................8

4. Expenses of Sale..............................................................................................................................................9

5. Installment Sale.............................................................................................................................................10

III. Capital Asset and Cost Recovery............................................................................... 11

1. Timber Basis ..................................................................................................................................................11

1) Basis of Purchased Timber.....................................................................................................................11

2) Basis of Inherited Timber........................................................................................................................12

3) Basis of Gifted Timber.............................................................................................................................13

2. Reforestation Costs.......................................................................................................................................14

3. Timber Depletion Deduction ......................................................................................................................15

4. Depreciation, Section 179 Expensing, and Special (Bonus) Depreciation.............................................16

IV. Expenses of Woodland Management and Protection................................................ 17

1. Woodland as an Investment .......................................................................................................................17

2. Woodland as a Business ..............................................................................................................................18

V. Cost-Share Payment ................................................................................................... 19

1. Tax Treatment in General............................................................................................................................19

2. Exclusion from Income ................................................................................................................................20

VI. Timber Losses............................................................................................................ 21

1. Casualty Loss ................................................................................................................................................21

2. Theft Loss.......................................................................................................................................................22

3. Condemnation ..............................................................................................................................................23

VII. Form T ....................................................................................................................... 24

More Information............................................................................................................. 25
 

1

 Federal Income Tax on Timber Frequently Asked Questions

I. YOUR WOODLAND TAX CLASSIFICATION 

1. PERSONAL PROPERTY 

Type of Activity

Your woodland property may be taxed 

under one of three tax classifications: 

personal property, 

investment (income-producing) 

property, or 

business property. 

The tax rules vary considerably with each 

classification. You must determine your 

property's tax classification for each tax 

year. 

How to Qualify for 

Best Tax Treatments

The determining factors for your woodland 

property's tax classification depend on why 

you own the property, your use of it, and 

your activities on it. 

Woodland property not used to produce 

income may be classified as being held for 

personal use. For example, your primary 

purpose for owning the property may be

for personal enjoyment, such as for a 

family retreat or for personal hunting and 

fishing, rather than for making a profit.

There are tax disadvantages for personal 

property: losses on the sale of personal 

property are generally not deductible 

except as casualty loss as a result of fire or 

storm damages or theft. Gains from sale of 

personal property are taxed as capital gains 

(IRS Publication 544). 

Reporting and Tax Forms

Use Form 1040 Schedule D and the new 

Form 8949 to report capital gains from 

sale or exchange of personal property. 

The adjusted basis of personal property is 

the original cost or other value of the 

property as determined under the tax law, 

adjusted for subsequent changes (see pages 

11 through 13 for a discussion of “basis”).

The amount of capital gains from sales of 

personal property is determined by 

subtracting the property's adjusted basis 

and selling expenses from the gross sale 

proceeds. 
 

2

 Federal Income Tax on Timber Frequently Asked Questions

I. YOUR WOODLAND TAX CLASSIFICATION 

2. INVESTMENT (INCOME-PRODUCING) PROPERTY 

Types of Activity

Woodland property held for incomeproducing purpose may be an investment

when your activity does not rise to the 

level of a trade or business. 

Sales of standing timber held as an 

investment are taxed as capital gains. 

Capital gains are defined as either longterm or short-term gains. 

If you owned your timber for 1 year or 

less, the capital gains from your timber sale 

are short-term; if you owned your timber

for longer than 1 year, the capital gains 

from your timber sale are long-term. 

Expenses for woodland held as an 

investment are deductible, but such 

deductions (together with other 

miscellaneous itemized deductions) are 

subject to 2% of your adjusted gross 

income floor (see page 17). Only the 

excess amount over the 2% floor is 

deductible. (This limitation is a 

disadvantage when compared to deductions 

allowed under the business classification—

see next page—in which all expenses are 

deductible, though other restrictions also 

apply.)

How to Qualify for 

Best Tax Treatment

You must have a profit objective to claim

an investment status for your woodland.

One of the best ways to document a profit 

objective is by including income 

production in your woodland management 

plan.

Timber owned primarily for generating 

profit may be classified as either an 

investment or business property. The 

distinction between an investment and 

business is based on specific 

circumstances. If your acreage is relatively 

"small" with infrequent sales transactions, 

you may prefer to claim the investment 

status for simplicity of filing. 

Reporting and Tax Forms

Use Form 1040 Schedule D and the new 

Form 8949 to report gains from sales of 

standing timber held as an investment. It's 

prudent to file Form T (Timber), Forest 

Activities Schedule, if you claim a 

deduction for depletion of timber (see page 

15). 

Timber management expenses for 

woodland held as investment are reported 

on Form 1040 Schedule A (see page 17).
 

3

 Federal Income Tax on Timber Frequently Asked Questions

I. YOUR WOODLAND TAX CLASSIFICATION 

3. BUSINESS PROPERTY

1) Business or Hobby 

Types of Activity

A business is an activity you regularly and 

continuously engage in primarily to make a 

profit. Although both investment status and 

business status require clear for-profit 

objectives, a business carries out timber 

activities on a more regular, active, and 

continuous basis than an investment. 

Which status applies depends on the 

specifics of each case.

If the profit objective is not met, your 

activity may be considered a hobby rather 

than a business. Losses that are deductible 

for a business are not allowed for a hobby.

How to Qualify for 

Best Tax Treatment

Business or Hobby. The IRS lists a set of 

factors to determine "profit" from an 

activity: 

Does the time and effort you put into 

the activity indicate an intention to 

make a profit?

Do you depend on income from the 

activity?

If there are losses, are they due to 

circumstances beyond your control or 

the start-up phase of the business?

Have you changed methods of 

operation to improve profitability?

Do you and your advisors have the 

knowledge needed to carry on the 

activity as a successful business?

Have you made a profit in similar 

activities in the past?

Does the activity make a profit in some 

years?

Can you expect to make a profit in the 

future from the appreciation of assets 

used in the activity? 

The IRS presumes a profit motive if you 

show a profit in at least 3 of the last 5 

years. Such "profit" includes the 

appreciation of asset, which is more 

relevant for the case of timber. You may 

have to prove a for-profit intent in case of 

an IRS audit. One of the best ways to 

document a profit objective is by including 

income generation in your woodland 

management plan.

Reporting and Tax Forms

Business. Use Form 4797 and Form 1040 

Schedule D for qualified sale of standing

timber (Section 631(b)) (see page 6). For 

sale of cut timber, if elected, report 

qualified capital gains portion on Form 

4979 and Form 1040 Schedule D, and the 

ordinary income portion on Form 1040 

Schedule C (Section 631(a)) (see page 7). 

The woodland management expenses are 

deductible on Form 1040 Schedule C (see 

page 18). 

Hobby. Income from a hobby activity is 

taxable as "other income" on Form 1040. 

Hobby expenses, deductible up to hobby 

income, are reported on Form 1040 

Schedule A. Hobby losses are generally 

not deductible. 
 

4

 Federal Income Tax on Timber Frequently Asked Questions

I. YOUR WOODLAND TAX CLASSIFICATION 

3. BUSINESS PROPERTY 

2) Passive Activity 

Types of Activity

Your timber activity may be a business if

you regularly and continuously engage in it 

primarily to earn a profit. Your 

participation in the business may be active 

or passive.

To be actively engaged in business, you

must "materially participate" in the 

business activity; otherwise, your 

participation may be a "passive" activity. 

For passive activities, the deduction of a 

business loss (expenses exceeding income) 

is restricted: loss from passive activity 

cannot offset income from non-passive 

activity (such as retirement income, salary, 

or self-employment income). You can 

carry the unused losses over into future 

years.

The passive loss rules apply to individuals, 

partners, and members of LLCs, S 

corporation interests, estates, and trusts. 

Note: Generally, woodland held as 

investment is not subject to the passive loss 

rules. 

How to Qualify for 

Best Tax Treatment

"Material participation" in the business 

may help avoid passive loss restrictions. 

To materially participate, your 

involvement must be "regular, continuous, 

and substantial.” If you meet at least one of 

the following tests, you are considered a 

material participant in your business: 

You participate in the activity for more 

than 500 hours during the tax year; 

Your participation constitutes 

substantially all of the involvement in 

the activity during the tax year; 

You participate for more than 100 

hours in the activity during the tax year 

and no other individual participates 

more;

Your participation in all of your 

"significant participation" businesses, 

including timber, exceeds 500 hours 

for the tax year (a "significant 

participation" activity is defined as a 

trade or business in which you 

participate for more than 100 hours); 

You materially participated in the 

activity for at least 5 of the preceding 

10 tax years; or 

All facts and circumstances indicate 

material participation (a minimum of 

100 hours is required).

Reporting and Tax Forms

Passive business losses are computed on 

Form 8582.

Keep records on the time you spend in 

managing your property to support your 

participation in the woodland business. 

Material participation must be established

on an annual basis. 
 

5

 Federal Income Tax on Timber Frequently Asked Questions

II. TIMBER SALES 

1. IF YOUR WOODLAND PROPERTY IS AN INVESTMENT 

Types of Forest Activity

If your timber is an investment, your 

standing timber sales are capital gains 

rather than ordinary income. 

Long-term capital gains are advantageous: 

They are taxed at lower rates than 

ordinary income. (In 2011, the 

maximum rate for long-term capital 

gain is 15% while the maximum rate 

for ordinary income is 35%.)

They are not subject to selfemployment tax (as ordinary business 

income is) except for gains from sale 

of property by passive business (which 

will be subject to a 3.8-percent 

Medicare tax starting in 2013 if the 

taxpayer’s individual adjusted gross 

income is over $200,000 or $250,000 

for a married filing jointly). 

They do not adversely affect your 

social security payments at retirement. 

Capital losses can offset capital gains in 

full as well as $3,000 ordinary income each 

tax year.

Short-term capital gains are taxed at 

ordinary income tax rates. 

How to Qualify for 

Best Tax Treatments

For sales to qualify for long-term capital 

gains, you must hold the investment 

timber*for longer than 1 year prior to the 

sale. 

If you receive the property as a gift and 

your basis is the donor’s basis (see page 

13), both the donor’s and your holding 

periods may be counted together as your

holding period (IRS Publication 544). If 

the recipient’s basis is the fair market value 

of the property, the recipient’s holding 

period starts after the date of gift (IRS 

Publication 17). 

If you inherit the property, your timber is 

considered long-term.

 

* The term “timber” includes evergreen trees 

that are more than 6 years old when severed 

from their roots and sold for ornamental 

purpose, such as Christmas trees.

Reporting and Tax Forms

Capital gains from sales of standing timber 

held as investment are reported on Form 

1040 Schedule D and the new Form 8949. 

It's prudent to file Form T (Timber), 

Forest Activities Schedule, if you claim a 

deduction for depletion of timber (see page 

15). The amount of capital gains is 

determined by subtracting the timber’s 

adjusted basis (pages 11 to 13) (through 

depletion) (see page 15) and selling 

expenses from the gross sale proceeds.

EXAMPLE

You sold 100 thousand board feet 

(Doyle scale) of southern loblolly pine 

sawtimber for $30,000 in 2011. The 

selling expenses totaled $4,500. You 

bought the timber in 2002 for $15,000 

as an investment. Your taxable capital 

gains are $10,500 ($30,000 - $4,500 -

$15,000). Since you owned the 

property for more than 1 year, the 

$10,500 capital gains are long-term. 

Report the sale on Form 1040 

Schedule D and the new Form 8949.

Since you claim a $15,000 (depletion) 

deduction, it's prudent to complete and 

attach Form T (Part II and Part III) to 

your return. 
 

6

 Federal Income Tax on Timber Frequently Asked Questions

II. TIMBER SALES 

2. IF YOUR WOODLAND PROPERTY IS A BUSINESS

1) Sale of Standing Timber (Section 631(b))

Type of Forest Activity

Qualified sales of standing timber*by a 

woodland business may be taxed as longterm capital gains (Section 1231 gains). 

This includes both lump-sum and pay-ascut standing timber sales. 

A lump-sum sale is an outright sale of 

standing timber for a fixed total amount 

agreed upon in advance. 

Under a pay-as-cut contract, the timber 

purchaser pays the seller at a specified rate 

per unit of timber actually cut. The seller 

bears the risk of loss until the timber is cut. 

The advantages of long-term capital gains 

are on page 5. 

 

* The term “timber” includes evergreen trees 

that are more than 6 years old when severed 

from their roots and sold for ornamental 

purpose, such as Christmas trees.

How to Qualify for 

Best Tax Treatments

To be eligible for long-term capital gains

(Section 1231 gains), you must be the 

owner of standing timber (including a 

sublessor of timber or the holder of a 

contract to cut the timber) for longer than 1 

year in a trade or business. 

Effective after December 31, 2004, 

outright sales of standing timber, as well as 

pay-as-cut sales, by a timber business 

qualifies for long-term capital gains if the 

timber is held for more than 1 year (as 

amended by the American Jobs Creation 

Act of 2004). 

Historic note: Prior to 2005, timber 

business owner had to sell the standing 

timber by a pay-as-cut contract (“retained 

economic interests”) to qualify for capital 

gains treatment. 

Reporting and Tax Forms

The gain or loss of the standing timber sale

in a business is the difference between the 

sale proceeds and the timber’s adjusted 

basis (see pages 11 to 13) (through 

depletion) (see page 15) and sales 

expenses. 

Use Form 4797 and Form 1040 Schedule 

D to report the standing timber sale in a 

business. Also it's prudent to file Parts II 

and III of Form T (Timber), Forest 

Activities Schedule (see "Form T" on page 

24) when you claim a deduction for 

depletion of timber (see page 15) or make 

an outright sale of timber in a trade or 

business. 

EXAMPLE

You run a timber-growing business. The highest bid for your standing timber by a logger 

was $40,000, and you accepted this offer. The adjusted basis of the timber was $5,000 and 

your selling expenses were $6,000. Since the timber is a property in your timber business 

for more than one year, the standing timber sale qualifies for long-term capital gains

(Section 631(b)). 

Your taxable capital gains of $29,000 ($40,000 - $6,000 - $5,000) are reported on Form 

4797, and Form 1040 Schedule D. It's prudent to file Form T (Parts II and III). 
 

7

 Federal Income Tax on Timber Frequently Asked Questions

MAKING SEC. 631(a) ELECTION

On Form T, Part II (Timber Depletion), 

Line 18, Section 631(a):

A. Are you electing, or have you made 

an election in a prior tax year that is, in 

effect, to report gains or losses from the 

cutting of timber under section 631(a)? 

(see instructions).

 Yes  No

EXAMPLE

You hired a logger who cut standing 

timber held longer than 1 year in your 

woodland business and hauled it to a local 

paper mill and sold it at $103/cord. It had 

an adjusted basis of $10/cord. The FMV 

of the standing timber on January 1 was 

$26/cord. The cut-n-haul cost was 

$67.5/cord. 

Without a Section 631(a) election, the 

entire gains of $25.5/cord is ordinary 

income ($103 - $67.5 - $10). Under 

Section 631(a) election, gains of $16/cord 

($26 - $10) from standing timber cutting 

are capital gains. The rest of $9.5/cord 

gains ($103 - $67.5 - $26) from sale of cut 

timber is ordinary business income. 

II. TIMBER SALES

2. IF YOUR WOODLAND PROPERTY IS A BUSINESS

2) Sale of Cut Timber (Section 631(a))

Type of Forest Activity

Instead of selling standing timber, timber 

business owners can cut the standing 

timber themselves or have their standing 

timber cut for them and then sell the cut 

timber products or use the timber in their 

businesses. 

This type of sale differs from standing 

timber sale in that it has two parts for tax 

purposes: standing timber “disposal,” if 

elected, and cut timber sale. All gains are 

ordinary income unless an election is made 

to treat standing timber cutting as a sale to 

qualify for capital gains (known as 

“Section 631(a)” election). 

See the advantages of long-term capital 

gains on page 5. 

How to Qualify for 

Best Tax Treatments

To qualify for capital gains (Section 1231 

gains) for the cutting of standing timber*, 

you must own or hold the contractual right 

to cut timber for longer than 1 year before 

it is cut. The timber must be cut for sale or 

for use in your business. Timber held for 

less than 1 year is not eligible. And you 

must make a (Section 631(a)) election on 

Form T (Timber), Forest Activities 

Schedules (see page 24). 

The capital gains from standing timber 

cutting is the difference between its fair 

market value (FMV) on the first day of the

tax year in which it is cut and its adjusted 

basis (see "basis" on pages 11 to 13 and 

"depletion" on page 15). 

The ordinary income from sale of cut

timber is the difference between sale price 

and the FMV of standing timber on the 

first day of the tax year in which it is cut 

minus cut-n-haul expenses. 

 

*The term “timber” includes evergreen trees 

that are more than 6 years old when severed 

from their roots and sold for ornamental 

purpose, such as Christmas trees.

Reporting and Tax Forms

For qualified timber, make the election for 

the year the timber cutting takes place on 

Line 18, Part II of Form T. No election is 

allowed on an amended return (Section

1.631-1(c)). Report the capital gains 

portion on Form 4797 and Form 1040 

Schedule D. Report ordinary income on 

the sales of cut timber on Form 1040 

Schedule C. File Form T when you make 

a Section 631(a) sale. 
 

8

 Federal Income Tax on Timber Frequently Asked Questions

II. TIMBER SALES 

3. FARMING AND TIMBER

Type of Forest Activity

Woodland owners may own farmland and 

engage in farming operations. Farmers may 

own timber, either as a minor part of their 

farming business or as a separate timber 

operation.

Generally growing timber is not treated as 

part of the business of “farming” for many 

income tax provisions, such as expensing 

of water and soil conservation costs and 

endangered species recovery costs (total 

deduction of such expenses are limited to

25% of gross income from farming) and 

income averaging for qualified farmers. 

Standing timber sales may be capital gains 

(provided they meet the requirements, see 

pages 5 to 7) while sales of farm crops are 

generally ordinary business income. 

How to Qualify for 

Best Tax Treatments

You are in the business of "farming" if you 

cultivate, operate, or manage a farm for 

profit, including “livestock, dairy, poultry, 

fish, fruit, and truck farms" as well as 

"plantations, ranches, ranges, and 

orchards” (IRS Publication 225). This 

definition typically does not include 

timber. 

The tax rules for timber sales (see pages 5 

to 7) apply to farmers who also own 

timber. 

Qualified reforestation costs may be 

deducted and amortized by a woodland 

owner and a farmer (see page 14).

A farmer may expense tree planting costs 

under the Conservation Reserve Program 

along with water and soil conservation 

expenses up to 25% of gross farming 

income. This excludes woodland owners.

Reporting and Tax Forms

Use Form 1040 Schedule F to report 

farming income and expenses, including 

minor sales of logs, firewood, or pulpwood 

if timber is a minor part of your farming 

operation. 

Use Form 1040 Schedule D and Form 

8949 to report sale of standing timber 

owned as capital asset (see page 1 and 5) 

by a woodland owner or a farmer who also 

owns timber. Report investment timber 

expenses on Form 1040 Schedule A (see 

page 17). 

Use Form 4797 and Form 1040 Schedule 

D to report qualified capital gains for 

timber business (see pages 6 and 7). Report 

timber business expenses on Form 1040 

Schedule C (see page 18). 
 

9

 Federal Income Tax on Timber Frequently Asked Questions

EXAMPLE 

You sold hardwood sawtimber for $8,000. 

Its adjusted basis was $1,000. You paid 

$800 to a consulting forester handling the 

sales. Your timber is an investment. 

Sale price $8,000

- Selling expenses $800

- Adjusted basis ("depletion"): $1,000 

Gains $6,200

You report the sale expenses on the new 

Form 8949 and Form 1040 Schedule D. It 

is prudent to file Form T (see page 24). 

II. TIMBER SALES 

4. EXPENSES OF SALE

Type of Forest Activity

Timber sale expenses are the costs incurred 

directly from the sale of timber, such as:

the costs of advertising;

timber cruising (to determine timber 

volume);

overnight travel (excluding commuting 

expenses);

marking for harvesting;

scaling (measurement of products);

legal fees; and

fees paid to consulting foresters

How to Qualify for 

Best Tax Treatments

Timber sale expenses are fully deductible 

from the sale proceeds. 

To support your timber sale expenses, 

adequate records must be maintained. This 

include receipts, bank statements, canceled 

checks, financial statements, invoices, mill 

scale slips, closing statements, 1099-S 

forms (reporting gross sale proceeds paid 

to you for the sale of your timber), sales 

contracts, and forest management plans to 

support the deduction. 

Reporting and Tax Forms

If your timber holding is an investment, 

timber sale expenses are reported on the 

new Form 8949 and Form 1040 Schedule 

D (see page 5). 

If your timber is a business, standing 

timber sales and the sales expenses are 

reported on Form 4797 and Form 1040 

Schedule D (see page 6). 

For business owners who elect to treat

timber cutting as sale under Section 631(a), 

the timber sale and sale expenses are 

reported on Form 4797 and Form 1040 

Schedule D and Schedule C (see page 7). 
 

10

 Federal Income Tax on Timber Frequently Asked Questions

EXAMPLE

In 2011, you sold $20,000 of timber, 

realizing a profit of $18,000. You 

took a note payable in March 2012. 

The sale is considered an installment 

sale because you receive one 

payment in the tax year after the year 

of sale. So you report the gain in 

2012 on Form 6252. 

You may elect not to use the 

installment method on your timber 

sale if you want to report the $18,000 

gain in 2011, the year of timber sale. 

II. TIMBER SALE 

5. INSTALLMENT SALE

Type of Forest Activity

An installment sale is a sale in which you 

receive one or more payments in a tax year 

after the year of timber sale rather than in 

full in the year of sale. 

An installment sale may allow you to defer 

tax and spread the gain over the installment 

payment periods; otherwise, you must pay 

taxes on the entire gains in the year of 

timber sale. 

How to Qualify for 

Best Tax Treatments

If you receive sale proceeds after the year 

of sale, you must use the installment sale 

reporting. You may, however, elect not to 

use the installment sales by reporting the 

entire profit in the year of sale, even 

though you will not be paid for all of the 

sale proceeds until later. 

Interest is generally charged on deferred 

payments. If interest is not charged, a 

portion of the payment must generally be 

calculated as (imputed) interest.

Installment sales generally do not apply to 

pay-as-cut contracts (even with "a retained 

economic interest") by the IRS regulation. 

Reporting and Tax Forms

For each year that you receive installment 

payments, report the gain on Form 6252. 

The gain is then transferred to Form 1040 

Schedule D for investment timber and 

Form 4797 for business timber. Form T

(Timber), Forest Activities Schedule, may 

also be required (see page 24). Interest 

payments you receive on the installments 

are reported as ordinary income. You can 

elect out of installment sale by including 

the entire gains on Form 1040 Schedule D

or Form 4797.

EXAMPLE

In 2011, you sold timber for $10,000 that 

you bought in 2000 for $4,000. Selling 

expenses were $1,000. You are to receive 

installment payments of $2,000 in 2011 

and 2012 and $6,000 in 2013, plus 

interest. Your gross profit is $5,000 

($10,000 - $4,000 - $1,000). Your gross 

profit percentage is 50% ($5,000 profit / 

$10,000 contract price). 

You file Form 6252 to report the gains of 

$1,000 (50% x $2,000 installment) in 

2011 and 2012 and $3,000 (50% x 

$6,000) for 2013. 

The interest payments are separately 

reported as ordinary income. 
 

11

 Federal Income Tax on Timber Frequently Asked Questions

III. CAPITAL ASSET AND COST RECOVERY

1. TIMBER BASIS 

1) Basis of Purchased Timber

Type of Forest Activity

Basis of purchased timber is its purchase 

cost. 

Documenting the timber basis is beneficial

because: 1) it reduces timber sale proceeds 

and thus reduces your taxes on timber sale; 

2) allows you to claim loss deduction if

your timber is lost, damaged, or destroyed 

by casualty, theft, condemnation; and 3) it 

allows you to recover the costs of 

reforestation that you may incur.

The cost of woodland purchase should be 

allocated among the capital assets 

acquired, such as land, timber, and other 

property, based on its relative share of their 

fair market value.

The best time to establish the original basis 

of your timber is at the time of acquisition 

because the timber volume and value may 

be readily available then. Retroactively 

determining timber basis may be 

acceptable but the cost of doing so should 

be weighed against any potential tax 

savings.

How to Qualify for 

Best Tax Treatments

The basis of purchased timber includes the 

purchase price of the timber and other 

acquisition costs, such as legal fees, 

accounting fees, title search, and 

consulting forester’s fees. 

Document your timber basis in premerchantable timber and merchantable 

timber categories (such as sawtimber, 

pulpwood, etc.). Include both timber 

volume and value in the basis. 

The original basis of timber may change 

over time by adjustments, such as new 

purchase, timber growth, timber loss or 

sale. The adjusted basis of timber is used 

to determine the gains or losses of timber 

sale, casualty, theft loss of timber, or 

condemnation. 

Reporting and Tax Forms

Document and report the original basis of 

timber in Form T (Timber), Forest 

Activities Schedule, Part I. If you are not 

required to file Form T, you should keep it 

as part of your records (see page 24). 

Subsequent adjustments to timber basis, 

such as timber growth and recovery of 

basis from timber sale, are made in Part II

of Form T. 

EXAMPLE

The tract of woodland next to your 

property was appraised at $40,000 

($10,000 for the land itself and $30,000 

for 3,000 cords of pulpwood timber on it). 

You purchased it for a total of $38,000. 

The seller gave you $2,000 discount 

because you paid in full by cash. You 

spent $200 in title search and $800 for 

consulting forester’s fees. So your total 

cost was 39,000 ($38,000 + $200 + $800), 

which should be allocated between land 

and pulpwood timber in proportion to 

their fair market value. 

The land’s basis is $9,750 ($39,000 x 

$10,000/$40,000) and the pulpwood’s 

basis is $29,250 ($39,000 x 

$30,000/$40,000). 
 

12

 Federal Income Tax on Timber Frequently Asked Questions

EXAMPLE

On June 2, 1998, you inherited the woodland that has been kept in the family for 

generations. In 2011, you had a timber sale. Your tax preparer asked your timber’s 

adjusted basis to file your tax return. 

You didn’t establish the timber basis at the time of inheritance. But your forester was 

able to provide a professional report that established the timber volume and fair market 

value on the date of the decedent’s death: 800 cords of pulpwood at $15 per cord. So 

your timber basis is $12,000 ($15 x 800 cords). Properly setting up timber basis saves 

taxes from the timber sales. 

III. CAPITAL ASSET AND COST RECOVERY

1. TIMBER BASIS

2) Basis of Inherited Timber

Type of Forest Activity

The basis of inherited timber is the fair 

market value of the timber on the date of 

the decedent’s death ("stepped-up" basis) 

or the value on the alternate valuation date 

(6 months after the date of death). 

There is another option for 2010 

decedents. An election allows a limited 

stepped-up basis, but the estate tax is 

eliminated entirely, regardless of the size 

of the estate. Such limit is $3 million if 

passed to spouse, plus an additional $1.3 

million to any other heirs. 

The basis of an inherited property under 

the special use valuation (of Section 

2032A) is the value under such method.

Your basis of land, timber, and other 

capital assets must be separately 

established. 

See page 11 for retroactive determination 

of timber basis and the advantage of 

establishing basis. 

See IRS Publication 4895, Tax Treatment 

of Property Acquired From a Decedent 

Dying in 2010.

How to Qualify for 

Best Tax Treatments

Establishing timber basis requires a 

determination of the timber volume and 

value on the date of the decedent’s death. 

The basis is set up by timber account (or 

"block" typically by large commercial 

landowners): for example, an area within

geographic boundaries, political 

boundaries, or management units. Keep 

track of timber volume as part of the 

timber basis. 

Retain records to verify your timber basis 

computations.

Reporting and Tax Forms

Document the original basis of timber on 

Form T (Timber), Forest Activities 

Schedule, Part I. If you are not required to 

file Form T, prepare and keep it as part of 

your records (see page 24). Subsequent 

adjustments to timber basis, such as timber 

growth and recovery of basis from timber 

sale, are made on Form T, Part II. 

For 2010 decedents, the estate must elect 

on Form 8939 by January 17, 2012 to use 

the limited stepped-up basis (this option

avoids the estate tax entirely). 
 

13

 Federal Income Tax on Timber Frequently Asked Questions

III. CAPITAL ASSET AND COST RECOVERY

1. TIMBER BASIS

3) Basis of Gifted Timber

Type of Forest Activity

If the fair market value (FMV) of the 

timber at the time of the gift is equal or 

more than the donor’s adjusted basis, your 

timber basis is the donor’s adjusted basis. 

Gift taxes paid by the donor may increase 

your basis by all or a portion of it 

depending on the date of the gift. 

If the timber's FMV at the time of the gift 

is less than the donor’s adjusted basis, your 

basis is: 1) the donor’s adjusted basis for 

figuring gain when you later dispose it; 2) 

the FMV on the date of gift for figuring 

loss from the sale. You may have neither a 

gain nor loss from sale of gifted timber if

you sell for more than the FMV but not 

more than the donor’s adjusted basis. 

See the benefits of establishing basis on 

page 11. Also see the explanation of 

retroactive determination of timber basis 

on page 11. 

How to Qualify for 

Best Tax Treatments

To determine the basis of gifted timber, 

you need to know the donor's basis, the 

FMV at the time of the gift, and gift taxes 

paid, if there were any. 

Establishing the original basis of timber at 

the time of gift saves time and money 

because timber value and volume 

information may be readily available. 

Reporting and Tax Forms

Document and report the original basis of 

timber in Form T (Timber), Forest 

Activities Schedule, Part I. If you are not 

required to file Form T, you should keep it 

as part of your records (see page 24). 

Subsequent adjustments to timber basis, 

such as timber growth and recovery of 

basis from timber sale are made on Form 

T, Part II. 

EXAMPLE

In 1999 your father transferred title to 

you, as a gift, a 49.5-acre woodland 

that had timber with a fair market value 

(FMV) of $16,000. His timber basis 

was $2,000. 

Since the FMV of timber of $16,000 is 

more than your father’s adjusted basis 

of $2,000, your original basis for the 

timber was $2,000, the donor’s basis. 
 

14

 Federal Income Tax on Timber Frequently Asked Questions

EXAMPLE

Reforesting your timber tract cost you

$12,000 in 2011. You can deduct 

$10,000 outright in 2011. Of the 

remainder, you can elect to deduct 

(amortize) $143 in 2011 (($12,000 -

$10,000) x 1/14). In 2012 through 2017, 

you can deduct $286 (($12,000 -

$10,000) x 1/7), and in 2018, you can 

write off the last $143. After you have 

recovered your entire reforestation costs, 

your timber basis will become zero. 

III. CAPITAL ASSET AND COST RECOVERY

2. REFORESTATION COSTS

Type of Forest Activity

Reforestation costs include site 

preparation, seedlings, labors, tools, 

consulting forester's fee, and depreciation 

on equipment used in planting and seeding. 

It also includes post-establishment brush 

control to ensure the survival of the stands. 

To recover the reforestation costs incurred 

after October 22, 2004: up to $10,000 per 

year ($5,000 if married filing separately) 

may be expensed in the year of 

reforestation per qualified timber property. 

Any excess amount over the $10,000 may 

be deducted ("amortized") over an 84-

month period: in the year of reforestation, 

you can deduct 1/14th of the excess costs. 

In the 2nd-7th years, 1/7th of the excess 

costs are deducted, and in the 8th year, the 

final 1/14th is deducted. 

The $10,000 expensing was increased to be 

$20,000 per eligible property in the Gulf 

Opportunity Zone for timber owners with 

no more than 500 acres, effective August 

27, 2005 through the end of 2007. Trusts, 

publicly traded C-corporations, and real 

estate investment trusts do not qualify. 

Historic note: The 10% investment tax 

credit (applicable for reforestation prior to 

October 23, 2004) was no longer available 

after October 22, 2004. 

How to Qualify for 

Best Tax Treatments

“Qualified expenditure” is direct costs 

incurred to establish commercial timber 

stands. 

"Qualified timber property" means a 

woodlot located in the United States that

will contain trees in significant commercial 

quantities. Both natural and artificial 

regeneration qualify. 

Individuals, estates, partnerships, and 

corporations are eligible for both the 

$10,000 reforestation expensing and the 

amortization provisions. Trusts are only 

eligible for the amortization provision. 

Reforestation must be kept separately from 

other timber account that is allowed for 

depletion or casualty loss. 

Reporting and Tax Forms

You make amortization election and report 

the amount on Form 4562 Part VI. 

Amortization election may only be made 

on a timely filed return (including 

extension) (Section 1.194-4(a)). However, 

for a timely filed return without making the 

election, the IRS allows the taxpayer to 

still make such election by filing amended 

return within 6 months of the due date of 

the return (excluding extension). Write 

"Filed pursuant to Section 301.9100-2" on 

Form 4562. Attach a statement to your tax 

return giving the purpose, nature, and 

amount of the expenditures and the date, 

location, and type of timber being grown 

(see the instructions for Form T (Timber), 

Forest Activities Schedule). 

For timber held as investment property, 

report the reforestation deduction in the 

front page of Form 1040 by writing 

“reforestation” and the amount in the 

"Adjusted Gross Income" section. For 

timber held as business property, report the 

reforestation amount under Other Expenses 

on Form 1040 Schedule C. Form T

(Timber), Forest Activities Schedule Part 

IV should be filled out as part of the record 

if not required to file (see page 24).

Note: Reforestation expensing and amortization can 

be deducted even if you do not take itemized 

deduction. 
 

15

 Federal Income Tax on Timber Frequently Asked Questions

III. CAPITAL ASSET AND COST RECOVERY

3. TIMBER DEPLETION DEDUCTION

Type of Forest Activity

“Depletion” refers to the cutting of 

standing timber. 

Depletion Unit =

Adjusted Basis / Total Timber Volume

The depletion unit is usually measured in 

dollars per unit of timber, such as tons, 

thousand board feet, or cords (or per 

individual tree for Christmas trees). 

Depletion Deduction =

Depletion Unit x Timber Volume Harvested

Depletion allows owners to recover timber 

basis at the time of timber sale. The 

amount of depletion is subtracted from the 

timber sale proceeds in computing the 

taxable gain or loss. 

How to Qualify for 

Best Tax Treatments

Depletion deductions are allowed to the 

owner of an economic interest in standing 

timber (Section 1.611-1(b)). The timber 

owners look for the return of capital 

invested.

Reporting and Tax Forms

The depletion deduction is reported in the 

year the timber is sold. It's prudent to file 

Form T (Timber), Forest Activities 

Schedule, with your tax return to claim the 

depletion deduction (see page 24). You 

calculate the depletion deduction using 

Part II of Form T. 

You must retain adequate records to 

substantiate your timber basis and the 

timber depletion deduction. 

EXAMPLE

You had a timber sale in 2011 in which

1,000 cords of pulpwood was sold at a 

lump sum of $15,000 ($15/cord). The 

total amount of timber on your property 

was 3,000 cords, with an adjusted basis 

of $6,000. Your selling expense was 

$1,000 for a consulting forester. 

Your timber depletion unit is $2/cord 

($6,000 / 3,000 cords). Your depletion 

deduction for the sale was $2,000 ($2 x

1,000 cords sold). The taxable gain was 

thus $12,000 ($15,000 - $2,000 

depletion - $1,000 expense). It's prudent 

to file Form T Parts II and III when a 

depletion deduction is claimed.
 

16

 Federal Income Tax on Timber Frequently Asked Questions

III. CAPITAL ASSET AND COST RECOVERY

4. DEPRECIATION, SECTION 179 EXPENSING, AND SPECIAL (BONUS) DEPRECIATION 

Type of Forest Activity

You may take a depreciation deduction on 

machinery and equipment over its useful 

life—for example: tractors, trucks, 

harvesting equipment, and computers. 

Also, land improvements, such as bridges, 

culverts, and temporary roads, can also be 

depreciated. However, the land cannot be 

depreciated. 

For timber business, a one-time first-year 

write-off of the purchase cost of the 

equipment, up to a set limit, is available if 

qualified (Section 179 expensing). In 2011, 

the maximum Section 179 expensing is 

$500,000, subject to $2 million phase-out 

and business taxable income limitations.

A special temporary additional (“bonus”) 

depreciation deduction may also be taken. 

In 2011, you may take bonus depreciation 

equal to 100% of the cost of qualified 

property placed in service in 2011.

How to Qualify for 

Best Tax Treatments

To qualify for the depreciation deduction, 

the property must: 1) be used in a business 

or held for the production of income; 2) 

have a determinable useful life longer than 

1 year; and 3) wear out, decay, or get used 

up. 

In most cases, you may use accelerated 

depreciation methods (such as 200% or 

150% declining balance with half-year 

convention) or elect to use a straight-line 

method. There is also a units-of-production 

method for land improvement such as 

logging roads. 

To qualify for Section 179 expensing, the 

property must be acquired by purchase. 

Your deduction is limited to the taxable 

income from your active business in the 

year, including wages; any excess over the 

limit may be carried to next year. If the

total purchase price exceeds $2 million for 

2011, your deduction is reduced.

Qualified properties for special (“bonus”) 

depreciation generally are tangible 

properties with a recovery period of 20 

years or less. The original use of the 

property must begin with you. It must be 

new property. 

Reporting and Tax Forms

Depreciation deduction, including any 

Section 179 expensing and bonus 

depreciation, are claimed on Form 4562.

You must elect to use the Section 179 

deductions on that form. You elect not to 

take the special bonus deprecation by 

attaching a statement to your return.

EXAMPLE

You spent $1,500 to purchase equipment 

with a 5-year useful life and used it 80% of 

the time in your timber business in 2011. 

You may elect to claim $1,200 (80% of 

$1,500) as a Section 179 deduction 

(subject to the business taxable income 

limit). 

Alternatively, you may use accelerated 

depreciation to deduct the $1,200 over 5 

years. You may deduct $240 (20% of 

$1,200) in the 1st year and $480 (32% of 

$1,200) in the 2nd year (using the “200% 

declining balance” with “half-year” 

convention). Or, you may elect to use the 

straight-line method to claim a 

depreciation deduction of $120 (10% of 

$1,200) for the 1st year and $240 (20% of 

$1,200) for the 2nd year. 

If it's a new property, you may use the 

bonus depreciation to deduct it. 
 

17

 Federal Income Tax on Timber Frequently Asked Questions

IV. EXPENSES OF WOODLAND MANAGEMENT AND PROTECTION

1. WOODLAND AS AN INVESTMENT

Type of Forest Activity

Costs incurred to manage and protect your 

woodland as a business may be currently 

deducted. These costs may include fees 

paid to consulting foresters, overnight 

travel expenses, the cost of tools with a 

useful life of less than 1 year, hired labor 

costs, road and firebreak maintenance 

costs, timber stand management expenses, 

and fire, insect, and disease control costs. 

Other deductible costs incurred by 

woodland owners include property taxes 

and interest on bank loans (“carrying 

charges”).

The costs of timber management and 

protection are deductible for woodland 

held as investment. But, they are only 

deductible to the extent that such costs 

exceed 2 percent of your adjusted gross 

income (as part of total miscellaneous 

itemized deductions). Property taxes are 

fully deductible. Interest on loans is 

deductible up to the net investment income 

(investment income minus investment 

expenses) in a year, with excess carried 

forward indefinitely. Alternatively, you 

may elect to capitalize the carrying charges 

and recover them from timber sales or 

casualty losses. 

How to Qualify for 

Best Tax Treatments

To permit the deduction of timber 

expenses, your timber must be held with 

the intention to make a profit. Deductible 

expenses must be ordinary and necessary

forest management expenses.

If you take standard deduction in a year, 

capitalizing the carrying charges may be 

beneficial. However, you may not 

capitalize carrying charges incurred in any 

year that your property is productive 

(generating income). 

Reporting and Tax Forms

Forest management expenses for timber 

property that is held as an investment is 

reported on Form 1040 Schedule A subject 

to the 2% adjusted gross income floor.

Alternatively, you may elect to capitalize 

the carrying charges by filing a statement 

indicating your election on a timely filed 

return.

EXAMPLE

This year you paid $200 property tax 

for your woodland held as an 

investment property. Additional 

expenses were:

$150 for consulting forester’s fee

$25 for tools and supply fee

$625 firebreak maintenance cost

Your adjusted gross income was 

$38,000. The $800 timber 

management expenses ($150 + $25 + 

$625) are deductible on Form 1040 

Schedule A, Itemized Deductions. 

However, it is subject to the 2% 

adjusted gross income floor. Thus, the 

actual deduction was only $40 ($800 -

$760). The $200 property tax may be 

deducted in full on Schedule A. 
 

18

 Federal Income Tax on Timber Frequently Asked Questions

IV. EXPENSES OF WOODLAND MANAGEMENT AND PROTECTION

2. WOODLAND AS A BUSINESS 

Type of Forest Activity

The forest management and protection 

costs (see examples on page 17) in your 

timber growing business are fully 

deductible against income from any source 

when you materially participate in the 

business (see "material participation" on 

page 4). 

Taking these deductions as part of business 

operations has advantages over deductions 

on investment property, which are subject 

to the 2% adjusted gross income floor (see 

page 17). Deductions by timber business 

operations are not subject to the 2% floor 

limitation.

The deduction for timber management and 

protection costs incurred in a business is 

limited if you do not materially participate 

in the activity (see page 4). The deduction 

from passive activity can only offset 

income from passive activity. 

How to Qualify for 

Best Tax Treatments

To currently deduct the woodland 

management and protection costs, you 

generally must meet the profit requirement 

and timber operations not be classified as 

hobby activity (see page 3). Note that 

profit requirement include the expectation 

of a future profit from asset appreciation. 

The expenses must be ordinary and 

necessary in carrying on your business 

during the tax year. Also, if your woodland 

business is a passive activity (see page 4), 

and your business has a loss, passive loss 

cannot be deducted in the current year. 

Reporting and Tax Forms

Report your deductible business expenses 

on Form 1040 Schedule C. Timber 

operation incidental to farming is reported 

on Form 1040 Schedule F. 

Specific lines are listed for taxes, interest

and travel and meals expenses; most timber 

management expenses that are not 

separately listed may be reported under

"Other Expenses". 
 

19

 Federal Income Tax on Timber Frequently Asked Questions

EXAMPLE

In 2011, you received $3,000 cost share 

payment to improve the timber stands 

in your woodland held as an 

investment. Your own out-of-pocket 

cost for it was $6,200. 

Because the cost share was used for 

tree stand improvement, a deductible 

expense rather than a capital 

expenditure, you report $3,000 under

“Other income” on the front page of 

Form 1040. You deduct the $9,200 as 

part of the forest management expenses 

on Form 1040 Schedule A, subject to 

2% of your adjusted gross income floor 

limitation for timber held as 

investment. 

V. COST-SHARE PAYMENT 

1. TAX TREATMENT IN GENERAL

Type of Forest Activity

Woodland owners may receive financial 

assistance (cost share or other payments)

when they undertake forest management or 

conservation practices on their woodland 

property recommended by Federal and 

State forestry agencies, farm agencies, or 

natural resource conservation agencies. 

The cost-share payments are reported on 

Form 1099-G, which is also sent to the 

IRS. You must account for the payments in 

your tax return.

Generally, cost-share payments are taxable 

income unless they are from an approved 

program that qualifies for the income 

exclusion (allowed under Section 126; see 

page 20 for exclusion treatment in details). 

How to Qualify for 

Best Tax Treatments

Forestry cost share payments received for 

purposes other than reforestation or other 

capital expenditure must always be 

included in gross income. The expenses 

may then be deducted, subject to the 

passive activity rules (see page 4) for 

business and the 2% gross adjusted income 

floor rule (see page 17) for investment 

timber.

Annual rental payment or the one-time 

incentive payment under the Conservation 

Reserve Program must be reported as 

income (Rev. Rul. 2003-59). These 

payments may not be excluded from gross 

income under Section 126.

Reporting and Tax Forms

For a timber business, report the cost share 

payment that must be included in your 

income on Form 1040 Schedule C. For 

timber investment property, report the cost 

share payment that must be treated as 

income under “Other income” on the front 

page of Form 1040. 
 

20

 Federal Income Tax on Timber Frequently Asked Questions

EXAMPLE

In 2011, you received a $4,000 costshare payment for capital expenditure in 

your woodland from a qualified federal 

program. Such cost share payment 

qualifies for income exclusion: 

If you had no income from the property 

in the last 3 years, you could exclude 

$3,876 (($2.50 x 100 acres) / 6.45%). 

The interest rate (6.45%) was from the 

Farm Credit System Bank (see Rev. Rul. 

2011-17 for interest rates). 

If you had $9,600 in income from the 

timber property, use $320 (10% of 

$9,600 / 3), which is greater than $250 

($2.50 x 100 acres) to calculate the 

exclusion amount: (10% x ($9,600 / 3)) / 

6.45% = $4,961. Since $4,000 cost share 

is less than the excludable amount of 

$4,961, your entire cost share of $4,000 

may be excluded. Attach a statement to

your tax return describing the cost-share 

program and your calculations. 

V. COST-SHARE PAYMENT 

2. EXCLUSION FROM INCOME

Type of Forest Activity

Qualified cost share payment may be 

partially or entirely excluded from your 

gross income to the extent allowed under 

Section 126 (Section 126 and Temporary 

and Proposed IRS Regulation 16A.126-1 

and 2).

Your cost share payment incurred for 

reforestation project qualifies for

reforestation tax deductions (see page 14) 

if the payment is included in your gross 

income. 

How to Qualify for 

Best Tax Treatments

To qualify for the income exclusion, the 

cost share payment must come from 

approved programs (by both the US 

Department of Agriculture and the 

Treasury for the federal programs), such as 

the Forest Health Protection Program, the 

Conservation Reserve Program, 

Conservation Security Program, 

Environmental Quality Incentives 

Program, Wildlife Habitat Incentives 

Program, and Wetlands Reserve Program. 

Several State programs also qualify.

Second, the cost share payment must be 

used for capital expenditure. You cannot 

exclude a payment for an expense you can 

deduct in the year you incur it. 

The excludable amount is the present value 

of the greater of $2.50 per acre or 10% of 

the average annual income from the 

affected acres in the last 3 years (see the 

Example for calculation steps). 

You may not deduct an expense 

reimbursed with a cost-share payment and 

at the same time exclude the cost share 

from your income.

Note: what interest rate to use is not

specifically defined. One source is to use 

Farm Credit System Bank rates (for estate 

valuation under Section 2032A). 

Reporting and Tax Forms

Attach a statement to your return that 

specifically describes the qualified cost 

share program and the calculation of the 

excludable portion. 
 

21

 Federal Income Tax on Timber Frequently Asked Questions

EXAMPLE

A fire caused an $8,000 loss of your 

timber ($9,000 before-fire FMV - $1,000 

after-fire FMV). Your timber basis in the 

affected property is $3,000. Your 

casualty loss deduction is $3,000. 

Report the loss on Form 4684 and adjust 

your timber basis (reducing it to zero) on 

Form T, Part II. 

VI. TIMBER LOSSES

1. CASUALTY LOSS

Type of Forest Activity

Loss of timber from casualty event such as 

fire or storms is deductible. However, the 

deduction is limited to the lesser of the 

decrease in fair market value (FMV)

caused by the casualty or your basis in the 

timber held as investment or business 

property. If you have not set up your 

timber basis, you may determine it 

retroactively. 

If the timber is salvageable and your 

salvage sale exceeds the adjusted basis of 

your timber, you have a taxable gain. 

However, you may postpone tax on the 

gain by acquiring qualified replacement 

property within the replacement period.

The appraisal fees are not part the of 

casualty loss. They are deductible expenses 

(miscellaneous itemized deductions). 

How to Qualify for 

Best Tax Treatments

To qualify, the loss must result from an 

identifiable event that is sudden, unusual, 

and unexpected, such as: an earthquake, 

fire, hurricane, tornado, or flood. 

To establish the timber basis or appraise 

the FMV loss of your timber from the 

casualty, you may need to consult a 

professional forester in determining the 

timber quantity and its FMV.

Casualty loss and the FMV loss appraisal 

are determined on the “single identifiable 

property damaged or destroyed”. This may 

be the property maintained in your timber 

record / account (or "block" typically by 

large commercial landowners on Form T).

It is important to keep records to support 

your FMV loss appraisal and timber basis 

for casualty loss deduction. 

Replacement property may take the form 

of reforestation, purchase of new 

timberland, purchase of standing timber or 

purchase of stock (at least 80%) of 

corporations that own timber or 

timberland. Generally, the replacement 

period ends 2 years after the close of the 

first tax year in which you realize the 

gains. 

Reporting and Tax Forms

Report casualty loss on Form 4684. Then,

for timber investment property, use Form 

1040 Schedule A or use Form 4797 for 

timber held as business property. 

Form T (Timber), Forest Activities 

Schedule, should also be prepared, 

although you may or may not be required 

to file it (see page 24). 

To defer the gain from salvage sales, file 

an attachment to the tax return making the 

election. 

Deduct the loss in the year it occurred. 

However, for federally declared disaster 

areas, the loss may be deducted in the 

preceding year upon election.
 

22

 Federal Income Tax on Timber Frequently Asked Questions

VI. TIMBER LOSSES

2. THEFT LOSS

Type of Forest Activity

Loss of timber due to theft is deductible. 

For timber property that is held as an 

investment or as a business, the deductible 

amount due to theft is the adjusted basis of 

timber less any insurance or other 

reimbursement you receive or expect to 

receive.

If you receive reimbursement in a later 

year that are more than what you expected 

when you estimated the deductible theft 

loss, include the excess as ordinary income 

for year in which you receive it. 

A theft may result in a taxable gain when 

you receive reimbursement that is more 

than your adjusted basis in the stolen 

timber. You may defer the tax on the gain 

if you purchase replacement property (see 

page 21) within a specified replacement

period (generally 2 years). If you do not 

spend all of your reimbursement on 

qualifying replacement property, you must 

report the difference as income. The basis 

in replacement property is its cost less any 

gain that you defer. 

How to Qualify for 

Best Tax Treatments

To prove a theft deduction, a landowner 

must show only that the theft of your 

property occurred, when you discovered 

that your property was stolen, and whether 

a claim for reimbursement exists. 

Reporting and Tax Forms

Theft losses are reported on Form 4684. 

Use Section B of this form for calculation 

of theft losses for business and investment 

property. Report your theft loss on 

business property on Form 4797. Report 

your theft loss from timber held as an 

investment property on Form 1040 

Schedule A. Also, Form T (Timber), 

Forest Activities Schedule, should be 

prepared, although you may or may not be 

required to file it (see page 24). 

You can deduct the theft losses in the year 

of discovery. 

To defer the taxable gain, you file an 

attachment to your return indicating: the 

details of the theft, the reimbursement you 

received, the calculation of the gain and the 

replacement property (or your election to 

purchase replacement property). 
 

23

 Federal Income Tax on Timber Frequently Asked Questions

VI. TIMBER LOSSES

3. CONDEMNATION

Type of Forest Activity

Condemnation is the lawful taking of 

private property for public use without the 

landowner's consent but with 

compensation to the owners. 

Property sale under a threat of 

condemnation is treated the same as a 

condemnation if you can provide 

reasonable grounds to establish that your 

property will be condemned.

The loss due to condemnation is 

determined in the same way as that for a 

casualty loss: the deductible amount is the 

lesser of the fair market value (FMV) loss 

or the property's adjusted basis.

If the condemnation compensation is 

greater than your basis in the property, a 

gain is realized. However, you may defer 

the gains by purchasing replacement 

property (see page 21). 

How to Qualify for 

Best Tax Treatments

To qualify, your property must have been 

condemned or have been threatened with 

condemnation. 

If timber is cut or sold by the landowner 

prior to condemnation, only the land is 

included in the loss calculation. 

The replacement period for a 

condemnation property such as standing 

timber ends 3 years after the close of the 

first tax year in which any portion of the 

gain from the condemnation is realized. 

Reporting and Tax Forms

Report timber loss due to condemnation on 

Form 4684. For business or investment 

property held for more than 1 year, you 

report on Form 4797. Report any gain or 

loss of timber you held for investment for 1 

year or less on Form 1040 Schedule D. 
 

24

 Federal Income Tax on Timber Frequently Asked Questions

VII. FORM T

Type of Forest Activity

Form T (Timber), Forest Activity 

Schedule, is a form on timber transactions. 

It can be a part of your timber tax records 

even if you are not required to file it. 

Timber acquisition, sale, reforestation, and 

stand management activities are all 

recorded on Form T. 

How to Qualify for 

Best Tax Treatments

You are required to file Form T only if 

you:

claim a timber depletion deduction;

sell cut timber products in your 

business (under Section 631(a)); or

make an outright sale of standing 

timber in your business (under Section

631(b)).

Exceptions: You are not required to file 

Form T "if you only make occasional 

timber sales (one or two sales every 3 or 4 

years)" (Form T Instructions). But "you 

must maintain adequate records." It's a 

prudent business practice to use Form T. 

Reporting and Tax Forms

Use Form T (Timber), Forest Activity 

Schedule, Part I to report acquisition, Part 

II for timber depletion, Part III for timber 

and land sales, Part IV for reforestation 

and timber stand activities, and Part V for 

land ownership. 

If you are required to file Form T, 

complete all the parts of the form that 

apply. 
 

25

 Federal Income Tax on Timber Frequently Asked Questions

MORE INFORMATION

Wang, L., and J.L. Greene. Tax Tips for Forest Landowners for the 2011 Tax Year. USDA Forest Service Southern Region 

Management Bulletin R8-MB 139. Available at <http://www.fs.fed.us/spf/coop/programs/loa/tax.shtml> and 

<www.timbertax.org> (free download).

USDA Forest Service Forest Tax website: <http://www.fs.fed.us/spf/coop/programs/loa/tax.shtml>. 

National Timber Tax website: <www.timbertax.org>.

Haney, H.L., Jr., W.L. Hoover, W.C. Siegel, and J.L. Greene. Forest Owners’ Guide to the Federal Income Tax, USDA Forest 

Service. Agriculture Handbook 718 (2001). Washington, DC. Available at <http://www.fs.fed.us/publications/2001/01jun19-

Forest_Tax_Guide31201.pdf> and <www.timbertax.org> (free downloads).

IRS Publication 544, Sales and Other Dispositions of Assets. Available at <www.irs.gov/pub/irs-pdf/p544.pdf> (free download).

IRS Publication 551, Basis of Assets. Available at <www.irs.gov/pub/irs-pdf/p551.pdf> (free download).