Federal Income Tax on Timber

A Quick Guide for Woodland Owners

Fourth Edition

2012

United States 

Department of 

Agriculture

Forest Service

FS-1007

October 2012
Federal Income Tax

on Timber

A Quick Guide for Woodland Owners

Fourth Edition*

2012

Linda Wang, Ph.D.

National Timber Tax Specialist, USDA Forest Service

* Publication based on three editions of the Federal Income Tax on Timber: A Key to Your Most Frequently Asked Questions (R8-TP-34, issued in April 2001 and revised in December 2005, and R8-TP-39, issued 

in November 2011) published by USDA Forest Service Southern Region. Authors of these issues include Harry L. Haney, Jr., Garland Gray Emeritus Professor of Forestery at Virginia Polytechnic Institute and 

State University; William C. Siegel, Attorney and USDA Forest Service Volunteer in River Ridge, LA; Larry M. Bishop, Former Forest Management and Taxation Specialist for the USDA Forest Service Southern 

Region; and Linda Wang, National Timber Tax Specialist for the USDA Forest Service.

United States 

Department of 

Agriculture

Forest Service

FS-1007

October 2012
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 Internal Revenue Service 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.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, age, disability, 

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

all or a part of an individual’s income is derived from any public assistance program. (Not all prohibited bases apply to all programs.) Persons with disabilities 

who require alternative means for communication of program information (Braille, large print, audiotape, etc.) should contact USDA’s TARGET Center at (202) 

720–2600 (voice and TDD). To file a complaint of discrimination write to USDA, Director, Office of Civil Rights, 1400 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.
iii

2012 Edition

This publication provides a quick reference on timber 

tax laws that are important to woodland owners. It 

presents concise and easy-to-understand explanations of 

issues related to woodland owners.

The intended audience includes woodland owners, 

loggers, and consulting foresters who need a basic 

understanding of Federal income tax rules on the management of woodland property. The publication is also 

a valuable resource for tax practitioners: certified public 

accountants, tax managers, enrolled agents, attorneys, 

and tax return preparers who seek a quick overview of 

timber tax rules.

Preface

Since the first income tax Form 1040 appeared in 1913, 

many timber tax provisions, which are commonly unknown by tax professionals, have been added to encourage management and stewardship of private woodland. 

This publication is prepared to help woodland taxpayers 

and their professional advisors learn and use these tax laws.

This fourth edition is updated with the 2012 tax information. It has a different title from the third edition to 

make it consistent with the revised content. 

Please send any comments about this publication to 

lwang@fs.fed.us.

Linda Wang,

National Timber Tax Specialist, USDA Forest Service

Preface

Contents

Introduction.................................................................. 1

Tax Classifications of Woodland Property................ 2

Personal Property ................................................... 2

Investment (Income-Producing) Property.............. 3

Business Property................................................... 4

Business or Hobby.......................................... 4

Passive Activity .............................................. 5

Farming........................................................... 6

Timber Sales................................................................. 7

Investment Sales..................................................... 7

Sales From Business Property................................ 8

Sale of Standing Timber (Section 631(b))...... 8

Sale of Cut Timber (Section 631(a))............... 9

Timber Sale Expenses.......................................... 10

Installment Sales................................................... 11

Capital Asset and Cost Recovery.............................. 12

Timber Basis......................................................... 12

Basis of Purchased Timber........................... 12

Basis of Inherited Timber............................. 13

Basis of Timber Received as a Gift .............. 14

Contents

Reforestation Costs............................................... 15

Timber Depletion Deduction ............................... 16

Depreciation, Section 179 Expensing, and 

Special (Bonus) Depreciation ....................... 17

Expenses of Woodland Management and 

Protection ............................................................ 18

Investment Property ............................................. 18

Business Property................................................. 19

Cost-Share Payment .................................................. 20

General Rule for Reporting Cost-Share 

Payments....................................................... 20

General Rule for Excluding a Cost-Share 

Payment From Income .................................... 21

Timber Losses............................................................. 22

Casualty Loss ....................................................... 22

Theft ..................................................................... 23

Condemnation of Timber Property....................... 24

Form T (Timber)........................................................ 25

For More Information ............................................... 26

1

This publication explains how the Federal tax laws 

apply to woodland property.

The first section describes the three types of woodland 

ownerships and the differing tax treatments for each. 

This section is very important because, as a woodland 

owner, you must determine your tax treatment each 

year. It also includes a discussion on how you may be 

taxed differently depending on if you use your land for 

farming or growing timber.

In the second through fourth sections, the publication 

shows you how to report income from a timber sale, 

how to set up the timber basis, and how to deduct the 

timber management cost. Deducting costs include the 

operation expenses, as well as the capital costs that 

are recovered by depreciation and depletion. Special 

reforestation tax rules are also covered here.

Next, the publication explains the tax treatment of costshare payments and how to deduct the loss of timber 

caused by fire or storms, theft, and condemnation.

Lastly, the publication addresses how and when to 

file the tax form for timber, which is Form T, Forest 

Activities Schedule.

For updates to this publication, please go to the Forest 

Service, an agency of the U.S. Department of Agriculture (USDA), Tax Web site at http://www.fs.fed.us/spf/

coop/programs/loa/tax.shtml.

Introduction

Introduction
Federal Income Tax on Timber: A Quick Guide for Woodland Owners

2

Tax Classifications of Woodland Property

Your woodland property may be taxed using one of the following three tax classifications:

1. Personal property.

2. Investment (income-producing) property.

3. Business property.

The tax rules vary considerably with each classification. For each tax year, you must determine 

your woodland property’s tax classification based on the following determining factors:

• Why you own the property.

• How you use the property.

• Your activities on the property.

Identifying Types of Activity 

If you do not use your woodland property to produce 

income, you may classify it 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.

Reporting and Tax Forms 

Use Form 1040 Schedule D and the new Form 8949 

to report capital gains from the 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 12 through 14 for a discussion of basis).

To calculate the amount of capital gains made from 

the sale of personal property, subtract the property’s 

adjusted basis and selling expenses from the gross sale 

proceeds.

Personal Property

Qualifying for the Best Tax Treatment

Please note that, as a landowner, you may face tax 

disadvantages for owning personal property. For 

example, your losses on the sale of personal property are 

generally not deductible except as casualty losses as a 

result of fire, storm damage, or theft. Gains from the sale 

of personal property are taxed as capital gains (Internal 

Revenue Service (IRS) Publication 544).
3

Identifying Types of Activity 

Woodland property held for an income-producing purpose may be considered an investment when the activity 

does not rise to the level of a trade or business.

The sale of standing timber that is held as an investment 

is taxed as a capital gain. Capital gains are defined as 

either long-term or short-term gains.

If you owned your timber for 1 year or less, the capital 

gains from your timber sale are considered short term; if 

you owned your timber for more than 1 year, the capital 

gains from your timber sale are considered long term.

Expenses for woodland held as an investment are deductible, but such deductions (together with other miscellaneous itemized deductions) are subject to 2 percent 

of your adjusted gross income (AGI) floor (see page 18). 

Only the excess amount of more than the 2-percent floor 

is deductible. This limitation is a disadvantage when 

compared with deductions allowed under the business 

classification—see next section—in which all expenses 

are deductible, although other restrictions also apply.

Qualifying for the 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 a business property. 

The distinction between an investment and a business 

is based on specific circumstances. If your acreage is 

relatively small, with infrequent sales transactions, you 

may prefer to claim it as an investment to simplify the 

filing process.

Reporting and Tax Forms 

Use Form 1040 Schedule D and the new Form 8949 

to report gains from the sale of standing timber held as 

an investment. It is prudent to file a Form T (Timber), 

Forest Activities Schedule, if you claim a deduction for 

the depletion of timber (see page 16).

Report timber management expenses for woodland held 

as investment on Form 1040 Schedule A (see page 18).

Tax Classifications of Woodland Property

Investment (Income-Producing) Property
Federal Income Tax on Timber: A Quick Guide for Woodland Owners

4

Identifying 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 forprofit 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.

Qualifying for the Best Tax Treatment 

The IRS lists a set of factors to determine profit motive 

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 losses are incurred, are they because of circumstances beyond your control or because the business 

is in the start-up phase? 

• 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 produced a profit in similar activities in the 

past?

• Does the activity produce 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 profit is realized in 

at least 3 of the past 5 years. Such profit, however, 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 8). For the 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 9). 

Deduct woodland management expenses on Form 1040 

Schedule C (see page 19).

Hobby: Use Form 1040 to report income from a hobby 

activity that is taxable as “Other income.” Report hobby 

expenses, deductible up to hobby income, on Form 1040 

Schedule A. Hobby losses, in general, are not deductible.

Business Property

Business or Hobby
5

Tax Classifications of Woodland Property

Business Property

Identifying 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 considered 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 nonpassive 

activity (such as retirement income, salary, or selfemployment income). You can, however, carry over the 

unused losses to future years.

The passive loss rules apply to individuals, partners, 

members of LLCs, and S corporation interests, estates, 

and trusts.

Note: In general, woodland held as investment is not 

subject to the passive loss rules.

Qualifying for the 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.

• All facts and circumstances indicate material participation (a minimum of 100 hours is required).

Reporting and Tax Forms

Compute passive business losses on Form 8582.

Keep records on the time spent managing the property to 

support your participation in the woodland business.

Material participation must be established on an annual 

basis.

Passive Activity
Federal Income Tax on Timber: A Quick Guide for Woodland Owners

6

Business Property

Identifying Types 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.

In general, growing timber is not treated as part of the 

business of farming for many income tax provisions, 

such as expensing water and soil conservation costs and 

endangered species recovery costs (total deduction of 

such expenses are limited to 25 percent 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 7 through 9), but 

sales of farm crops, in general, are considered ordinary 

business income.

Qualifying for the Best Tax Treatments

According to IRS Publication 225, 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” and “plantations, ranches, ranges, and orchards.” This definition typically does not include timber.

The tax rules for timber sales (see pages 7 through 9) 

apply to farmers who also own timber.

As a woodland owner and a farmer, you may deduct and 

amortize qualified reforestation costs (see page 15).

If you are a farmer, you may expense tree-planting costs 

under the Conservation Reserve Program, along with 

water and soil conservation expenses up to 25 percent of 

gross farming income. This deduction rule is not available to 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.

If you are a woodland owner or a farmer who also owns 

timber, use Form 1040 Schedule D and Form 8949 to 

report the sale of standing timber owned as capital asset 

(see page 7). Report investment timber expenses on 

Form 1040 Schedule A (see page 18).

Use Form 4797 and Form 1040 Schedule D to report 

qualified capital gains for a timber business (see pages 8 

and 9). Report timber business expenses on Form 1040 

Schedule C (see page 19).

Farming
7

Timber Sales

Investment Sales

Identifying Types of Forest Activity

If your woodland is categorized as an investment, your 

standing timber sales are considered capital gains rather 

than ordinary income.

Long-term capital gains are advantageous in the following ways.

• Capital gains are taxed at lower rates than ordinary 

income. (In 2012, the maximum rate for long-term 

capital gain was 15 percent, and the maximum rate 

for ordinary income was 35 percent.)

• Capital gains are not subject to a self-employment 

tax (as ordinary business income is) except for gains 

from the sale of a property by a passive business 

(which will be subject to a 3.8-percent Medicare tax 

starting in 2013 if the taxpayer’s individual AGI is 

more than $200,000 or $250,000 for a married person 

filing jointly).

• Capital gains do not adversely affect your social 

security payments at retirement.

• Capital losses can offset capital gains in full as well 

as the $3,000 ordinary income each tax year.

Short-term capital gains are taxed at ordinary income 

tax rates.

Qualifying for the Best Tax Treatments

For a timber sale to qualify as a long-term capital gain, 

you must hold the investment timber* for more than 

1 year before the sale.

If you receive the property as a gift and your basis is 

the donor’s basis (see page 14), both the donor’s and 

your holding periods may be counted together as your 

holding period (IRS Publication 544). If, as the recipient, your basis is the fair market value (FMV) of the 

property, your holding period starts after the date of gift 

(IRS Publication 17).

If you inherit the property, your timber profit realized 

upon selling, is considered to be a long-term gain.

* The term “timber” includes evergreen trees that are more than 

6 years old when they are severed from their roots and sold for 

ornamental purposes, such as Christmas trees.

You sold 100,000 board feet (Doyle scale) of southern 

loblolly pine sawtimber for $30,000 in 2012. 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. 

Because you claim a $15,000 (depletion) deduction, 

it is prudent to complete and attach Form T (Parts II 

and III) to your return.

Example

Reporting and Tax Forms

Report capital gains from the sale of standing timber 

that is held as an investment on Form 1040 Schedule 

D and the new Form 8949. It is prudent to file Form T 

(Timber), Forest Activities Schedule, if you claim a deduction for depletion of timber (see page 16). Determine 

the amount of capital gains by subtracting the timber’s 

adjusted basis (pages 12 to 14) (through depletion) 

(see page 16) and selling expenses from the gross sale 

proceeds.

Timber Sales
Federal Income Tax on Timber: A Quick Guide for Woodland Owners

8

Identifying Types of Forest Activity

Qualified sales of standing timber by a woodland business may be taxed as long-term capital gains (Section 

1231 gains). These sales include both lump-sum and 

pay-as-cut standing timber sales.

A lump-sum sale is an outright sale of standing timber 

for a fixed total amount agreed on 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 listed on 

page 7.

Qualifying for the 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 more than 1 year in a trade or business.

Effective after December 31, 2004, outright sales of 

standing timber and pay-as-cut sales by a timber business qualify for long-term capital gains after the timber 

has been held for more than 1 year (as amended by the 

American Jobs Creation Act of 2004).

Historic note: Before 2005, timber business owners 

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 equal to the sale proceeds minus the timber’s adjusted 

basis (see pages 12 to 14) (through depletion) (see page 16) 

and sales expenses.

Use Form 4797 and Form 1040 Schedule D to report 

the standing timber sale in a business. It is prudent to 

file Parts II and III of Form T (Timber), Forest Activities Schedule (see Form T on page 25), when claiming 

a deduction for depletion of timber (see page 16) or 

making an outright sale of timber in a trade or business.

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. 

Because the timber is a property in your timber business for more than 1 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 is prudent to file Form T (Parts II and 

III).

Example

Sales From Business Property

Sale of Standing Timber (Section 631(b))

* The term “timber” includes evergreen trees that are more than 

6 years old when they are severed from their roots and sold for 

ornamental purposes, such as Christmas trees.
9

Identifying Types of Forest Activity

Instead of selling standing timber, you can cut the standing timber and then sell the cut timber products or use 

the timber in your business.

This type of sale differs from a standing timber sale 

because it has two parts for tax purposes: standing 

timber disposal, if elected, and cut timber sale. All gains 

are considered ordinary income unless you elect 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 7.

Qualifying for the 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 more 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. In addition, you must make an (Section 

631(a)) election on Form T (Timber), Forest Activities 

Schedule (see page 25).

The capital gains from standing timber cutting is the 

difference between its FMV on the first day of the tax 

year in which it is cut and its adjusted basis (see “basis” 

on pages 12 to 14 and “depletion” on page 16).

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.

Reporting and Tax Forms

For qualified timber, make Section 631(a) election in 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.

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 are 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.

Example

MAKING SEC. 631(a) ELECTION

On IRS Form T, Part II (Timber Depletion), Line 18, 

Section 631(a):

A. Are you electing, or have you made an election in 

a previous tax year that is, in effect, to report gains or 

losses from the cutting of timber under section 631(a)? 

(See instructions.)

 ̈ Yes  ̈ No

Timber Sales

Sales From Business Property

Sale of Cut Timber (Section 631(a))

* The term “timber” includes evergreen trees that are more than 

6 years old when they are severed from their roots and sold for 

ornamental purposes, such as Christmas trees.
Federal Income Tax on Timber: A Quick Guide for Woodland Owners

10

Timber Sale Expenses

Identifying Types of Forest Activity

Timber sale expenses are the costs incurred directly 

from the sale of timber and include the following costs:

• Advertising

• Timber cruising (to determine timber volume)

• Overnight travel

• Marking for harvesting

• Scaling (measurement of products)

• Legal fees

• Fees paid to consulting foresters

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 25).

Example

Qualifying for the Best Tax Treatments

Timber sale expenses are fully deductible from the sale 

proceeds.

To support your timber sale expense deduction, maintain 

adequate records. These records 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, report timber 

sale expenses on the new Form 8949 and Form 1040 

Schedule D (see page 7).

If your timber is a business, report standing timber sales 

and the sales expenses on Form 4797 and Form 1040 

Schedule D (see page 8).

Business owners who elect to treat timber cutting as sale 

under Section 631(a) should report the timber sale and 

sale expenses on Form 4797 and Form 1040 Schedule D 

and Schedule C (see page 9).
11

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 

received 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.

Example

In 2011, you sold timber, which you bought in 2000 for 

$4,000, for $10,000. 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 percent ($5,000 

profit/$10,000 contract price).

You file Form 6252 to report the gains of $1,000 (50 

percent x $2,000 installment) in 2011 and 2012 and 

$3,000 (50 percent x $6,000) for 2013.

The interest payments are reported separately as 

ordinary income.

Example

Timber Sales

Installment Sales

Identifying Types 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.

Qualifying for the 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 generally must 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 25). Report interest payments you receive on the 

installments as ordinary income. You can elect out of 

installment sales by including the entire gains on Form 

1040 Schedule D or Form 4797.
Federal Income Tax on Timber: A Quick Guide for Woodland Owners

12

Capital Asset and Cost Recovery

Identifying Types of Forest Activity

The basis of purchased timber is its purchase cost.

Documenting the timber basis is beneficial because it 

(1) reduces timber sale proceeds and, thus, reduces your 

taxes on timber sale; (2) enables you to claim loss deduction if your timber is lost, damaged, or destroyed by 

casualty, theft, or condemnation; and (3) 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 FMV.

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.

Qualifying for the 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). Include both timber volume and value in the 

basis.

The original basis of timber may change over time 

through adjustments, such as a 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 on 

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 25). Subsequent 

adjustments to timber basis, such as timber growth and 

recovery of basis from timber sale, are made in Part II 

of Form T.

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 a $2,000 discount because you paid in full by cash. 

You spent $200 for a title search and $800 for a consulting forester’s fees. Your total cost was 39,000 

($38,000 + $200 + $800), which should be allocated 

between land and pulpwood timber in proportion to 

their FMV.

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).

Example

Timber Basis

Basis of Purchased Timber
13

Timber Basis

Identifying Types of Forest Activity

The basis of inherited timber is the FMV 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).

As another option for 2010 decedents, an election 

enables a limited stepped-up basis, but the estate tax is 

eliminated entirely, regardless of the size of the estate. 

Such a limit is $3 million if passed to a spouse, plus an 

additional $1.3 million if passed 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 12 for retroactive determination of timber 

basis and the advantage of establishing basis.

Basis of Inherited Timber

Qualifying for the 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 25). 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 have elected on 

Form 8939 by January 17, 2012, to use the limited 

stepped-up basis (this option avoids the estate tax 

entirely).

On June 2, 1998, you inherited the woodland that has been kept in the family for generations. In 2012, you had a timber 

sale. Your tax preparer asked for your timber’s adjusted basis to file your tax return.

You did not 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 FMV 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.

Example

Capital Asset and Cost Recovery

See IRS Publication 4895, Tax Treatment of Property Acquired 

From a Decedent Dying in 2010.
Federal Income Tax on Timber: A Quick Guide for Woodland Owners

14

Identifying Types of Forest Activity

If the FMV of the timber at the time of the gift is equal 

to 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 

of it or (2) the FMV on the date of the 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 for more than the donor’s adjusted basis.

See the benefits of establishing basis on page 12. Also 

see the explanation of retroactive determination of 

timber basis on page 12.

Qualifying for the 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 the amount of gift taxes paid, if 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 on 

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 25).

Subsequent adjustments to timber basis, such as timber 

growth and recovery of basis from timber sale, are made 

on Form T, Part II.

In 1999, your father transferred title to you, as a gift, of a 49.5-acre woodland that had timber with an FMV of $16,000. 

His timber basis was $2,000.

Because 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.

Example

Timber Basis

Basis of Timber Received as a Gift
15

Identifying Types 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 

of more than the $10,000 may be deducted (amortized) 

over an 84-month period; in the year of reforestation, 

you can deduct one-fourteenth of the excess costs. In 

the second through seventh years, you can deduct oneseventh of the excess costs, and in the eighth year, you 

can deduct the final one-fourteenth.

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-percent investment tax credit (applicable for reforestation before October 23, 2004) was 

no longer available after October 22, 2004.

Qualifying for the Best Tax Treatments

Qualified expenditure is direct costs incurred to establish 

commercial timber stands.

Qualified timber property is 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 eligible only for 

the amortization provision.

Reforestation accounts must be kept separately from 

other timber accounts that allow for depletion or 

casualty loss.

Reporting and Tax Forms

You may elect amortization and report the amount 

on Form 4562 Part VI. Amortization election may be 

made only on a timely filed return (including extension) 

(Section 1.194-4(a)). For a timely filed return without 

making the election, however, the IRS allows the taxpayer to still make such election by filing an 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, providing 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 on 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 25).

Note: Reforestation expensing and amortization can be 

deducted even if you do not take itemized deductions.

Capital Asset and Cost Recovery

Reforestation Costs

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 remaining $143. 

After you have recovered your entire reforestation 

costs, your timber basis will become zero.

Example
Federal Income Tax on Timber: A Quick Guide for Woodland Owners

16

Qualifying for the 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

Report the depletion deduction in the year the timber 

is sold. It is prudent to file Form T (Timber), Forest 

Activities Schedule, with your tax return to claim the 

depletion deduction (see page 25). 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.

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 is prudent to file Form T Parts II and III

when a depletion deduction is claimed.

Identifying Types of Forest Activity Example

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 to compute the 

taxable gain or loss.

Timber Depletion Deduction 
17

You spent $1,500 to purchase equipment with a 

5-year useful life and used it 80 percent of the time in 

your timber business in 2012. You may elect to claim 

$1,200 (80 percent 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 percent of $1,200) in the first year and $480 (32 percent of $1,200) in the second year (using the 200 percent declining balance with half-year convention). Or, 

you may elect to use the straight-line method to claim 

a depreciation deduction of $120 (10 percent of $1,200) 

for the first year and $240 (20 percent of $1,200) for 

the second year.

If it is a new property, you may use the bonus depreciation to deduct it.

Example

Depreciation, Section 179 Expensing, and Special (Bonus) Depreciation

Identifying Types 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, 

you can depreciate land improvements, such as bridges, 

culverts, and temporary roads. The land, however, cannot be depreciated.

For timber business, a one-time, first-year writeoff of 

the purchase cost of the equipment, up to a set limit, is 

available if the expenditure is qualified (Section 179 

expensing). In 2011, the maximum Section 179 expensing was $500,000, subject to a $2 million phaseout and 

business taxable income limitations. In 2012, Section 

179 expensing is limited to $139,000 and the phaseout 

limit is $560,000.

You may also take a special temporary additional 

(bonus) depreciation deduction. In 2011, you could take 

bonus depreciation equal to 100 percent of the cost of 

qualified property placed in service in 2011. The bonus 

depreciation rate is 50 percent for qualified property 

in 2012 (the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010).

Qualifying for the 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 that is longer 

than 1 year; and (3) wear out, decay, or get used up.

In most cases, you may use accelerated depreciation 

methods (such as a 200-percent or 150-percent declining balance with half-year convention) or elect to use 

a straight-line method. You can also use a units-ofproduction method for land improvement, such as 

logging roads.

To qualify for Section 179 expensing, you must acquire 

the property by purchase. Your deduction is limited 

to the taxable income from your active business in the 

year, including wages; any excess of more than the limit 

may be carried to the next year. If the total purchase 

price exceeds $2 million for 2011 ($560,000 for 2012), 

your deduction is reduced.

Qualified properties for special (bonus) depreciation, in 

general, 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

Claim depreciation deduction, including any Section 

179 expensing and bonus depreciation, on Form 4562. 

You must elect to use the Section 179 deductions on 

that form. Bonus depreciation is automatically assumed 

(even if you did not claim it) unless you make an election 

not to use it by attaching a statement to your return. 

Capital Asset and Cost Recovery
Federal Income Tax on Timber: A Quick Guide for Woodland Owners

18

Expenses of Woodland Management and Protection

Identifying Types of Forest Activity

Costs incurred to manage and protect your woodland 

as a business may currently be 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 an investment, but they 

are deductible only to the extent that such costs exceed 

2 percent of your AGI (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.

Qualifying for the 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 a standard deduction in a year, capitalizing 

the carrying charges may be beneficial. You may 

not capitalize carrying charges incurred in any year 

that your property is productive (generating income), 

however. This year you paid $200 in property tax for your 

woodland held as an investment property. Additional 

expenses included the following:

• $150 for consulting forester’s fee.

• $25 for tools and supply fee.

• $625 firebreak maintenance cost.

Your AGI was $38,000. The $800 timber management 

expenses ($150 + $25 + $625) are deductible on 

Form 1040 Schedule A, Itemized Deductions. The 

deduction is subject to the 2-percent AGI floor, however. Thus, the actual deduction was only $40 ($800 - 

$760). The $200 property tax may be deducted in full 

on Schedule A.

Example

Investment Property

Reporting and Tax Forms

Forest management expenses for timber property that 

is held as an investment is reported on Form 1040 

Schedule A and are subject to the 2-percent AGI floor. 

Alternatively, you may elect to capitalize the carrying 

charges by filing a statement indicating your election on 

a timely filed return.
19

Identifying Types of Forest Activity

The forest management and protection costs (see examples on page 18) 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 5).

Taking these deductions as part of business operations 

has advantages over deductions on investment property, 

which are subject to the 2-percent AGI floor (see page 18). 

Deductions by timber business operations are not subject 

to the 2-percent 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 5). The 

deduction from passive activity can offset income only 

from passive activity.

Qualifying for the Best Tax Treatments

To currently deduct the woodland management and 

protection costs, you generally must meet the profit 

requirement, and timber operations must not be classified as hobby activity (see page 4). Note that profit 

requirement includes 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 5) and your business has a loss, passive loss cannot be deducted in the current year.

Expenses of Woodland Management and Protection

Business Property

Reporting and Tax Forms

Report your deductible business expenses on Form 1040 

Schedule C. Report timber operation incidental to farming 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.
Federal Income Tax on Timber: A Quick Guide for Woodland Owners

20

Cost-Share Payment

Identifying Types of Forest Activity

You may receive financial assistance (cost-share or other 

payments) when you undertake forest management or 

conservation practices recommended by Federal and 

State forestry agencies, farm agencies, or natural resource 

conservation agencies on your woodland property.

The payment issuing agency is required to report the 

cost-share payment and send copies to you and the IRS 

on Form 1099-G. You must account for the payments 

in your tax return.

In general, cost-share payments are considered taxable 

income unless they are from an approved program that 

qualifies for the income exclusion (allowed under Section 126; see page 21 for exclusion treatment in details).

Qualifying for the Best Tax Treatments

Forestry cost-share payments that are received for 

purposes other than reforestation or other capital expenditures must always be included in gross income. The 

expenses may then be deducted, subject to the passive 

activity rules (see page 5) for business and the 2-percent 

AGI floor rule (see page 18) for investment timber.

The 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.

In 2012, you received a $3,000 cost-share payment 

to improve the timber stands in your woodland held 

as an investment. Your own out-of-pocket cost for the 

project was $6,200.

Because you used the cost-share payment for tree 

stand improvement, which is 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 percent of your AGI floor limitation for timber held as 

investment.

Example

General Rule for Reporting Cost-Share Payments

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.
21

Identifying Types of Forest Activity

Qualified cost-share payments may be partially or entirely 

excluded from your gross income to the extent allowed 

under Section 126 (Section 126 and Temporary IRS 

Regulation 16A.126-1 and 16A.126-2).

If your cost-share payment was incurred for a reforestation project, the payment qualifies for reforestation tax 

deductions (see page 15) if it is included in your gross 

income.

Qualifying for the Best Tax Treatments

To qualify for the income exclusion, the cost-share 

payment must come from approved programs (by both 

the U.S. Departments of Agriculture and the Treasury 

for the Federal programs), such as the Forest Health 

Protection Program, Conservation Reserve Program, 

Conservation Security Program, Environmental Quality 

Incentives Program, Wildlife Habitat Incentives Program, 

and Wetlands Reserve Program. Several State programs 

also qualify.

In 2011, you received a $4,000 cost-share payment for 

capital expenditure in your woodland from a qualified 

Federal program. Such cost-share payments qualify for 

income exclusion.

If you had no income from the property in the past 

3 years, you could exclude $3,876 (($2.50 x 100 

acres)/6.45 percent). The interest rate (6.45 percent) 

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 percent of $9,600/3), which is greater 

than $250 ($2.50 x 100 acres) to calculate the exclusion amount: (10 percent x ($9,600/3))/6.45 percent 

= $4,961). Because a $4,000 cost-share payment 

is less than the excludable amount of $4,961, your 

entire cost-share payment of $4,000 may be excluded. 

Attach a statement to your tax return describing the 

cost-share program and your calculations.

Example

General Rule for Excluding a Cost-Share Payment From Income

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 percent of the average annual 

income from the affected acres in the past 3 years (see 

the example for calculation steps on this page).

You may not deduct an expense reimbursed with a 

cost-share payment and, at the same time, exclude the 

cost-share payment from your income.

Note: The 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.

Cost-Share Payment

Note that the tax regulations use “the value of improvement” in 

calculating the taxable amount. Here, we assume that “the value of 

improvement” is the same as the cost (especially for reforestation) 

to simply the calculation.
Federal Income Tax on Timber: A Quick Guide for Woodland Owners

22

Timber Losses

Identifying Types of Forest Activity

Loss of timber from a casualty event, such as a fire or 

storm, is deductible. The deduction, however, is limited 

to the lesser of the decrease in 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. You may postpone tax on the gain, however, by acquiring qualified replacement property within 

the replacement period.

The appraisal fees are not part of the casualty loss. 

They are deductible expenses (miscellaneous itemized 

deductions).

Qualifying for the Best Tax Treatments

To qualify, the loss must result from an identifiable 

event that is sudden, unusual, and unexpected, such as 

an earthquake, a fire, a hurricane, a tornado, or a 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 basis of single identifiable property damaged or 

destroyed. This property may be the one that is maintained in your timber record/account (or block, typically 

by large commercial landowners) on Form T (Timber).

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 timber land, purchase of standing 

timber or purchase of stock (at least 80 percent) of 

corporations that own timber or timber land. In general, 

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.

Also, prepare Form T (Timber), Forest Activities 

Schedule, although you may or may not be required to 

file it (see page 25).

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. For federally 

declared disaster areas, however, the loss may be 

deducted in the preceding year upon election.

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.

Example

Casualty Loss
23

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 was 

more than what you expected when you estimated the 

deductible theft loss, include the excess as ordinary 

income for the year in which you received 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 22) within 

a specified replacement period (in general, 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.

Qualifying for the Best Tax Treatments

To prove a theft deduction, a landowner must show only 

that the theft of the property occurred, when he or she 

discovered that the property was stolen, and whether he 

or she filed a claim for reimbursement.

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, prepare Form T (Timber), Forest 

Activities Schedule, although you may or may not be 

required to file it (see page 25).

You can deduct the theft losses in the year of discovery.

To defer the taxable gain, 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).

Theft

Identifying Types of Forest Activity

Timber Losses
Federal Income Tax on Timber: A Quick Guide for Woodland Owners

24

Condemnation of Timber Property

Identifying Types 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 because of condemnation is determined in 

the same way as that for a casualty loss: the deductible 

amount is the lesser of the FMV loss or the property’s 

adjusted basis.

If the condemnation compensation is greater than your 

basis in the property, a gain is realized. You may defer 

the gains, however, by purchasing replacement property 

(see page 22).

Qualifying for the 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 before 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, 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.
25

Form T

Form T (Timber)

Qualifying for the Best Tax Treatments

You are required to file Form T only if you do one of 

the following:

• Claim a timber depletion deduction.

• Sell cut timber products in your business (under 

Section 631(a)).

• 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),” but “you must maintain adequate 

records” (Form T Instructions). It is a prudent business 

practice to use Form T.

Reporting and Tax Forms

Use Form T (Timber), Forest Activities 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.

Identifying Types of Forest Activity

Form T (Timber), Forest Activities 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.
Federal Income Tax on Timber: A Quick Guide for Woodland Owners

26

For More Information

Haney, Jr., H.L.; Hoover, W.L.; Siegel, W.C.; Greene, 

J.L. 2001. Forest owners’ guide to the Federal Income 

Tax, USDA Forest Service. Agriculture Handbook 

718. Washington, DC: U.S. Department of Agriculture, 

Forest Service. Available at http://www.fs.fed.us/

publications/2001/01jun19-Forest_Tax_Guide31201.pdf 

and www.timbertax.org (free download).

Internal Revenue Service (IRS). 2012. Sales and other 

dispositions of assets. IRS Publication 544. Washington, 

DC: Internal Revenue Service. Available at http://www.

irs.gov/pub/irs-pdf/p544.pdf (free download).

Internal Revenue Service (IRS). 2012. Basis of assets. 

IRS Publication 551. Washington, DC: Internal Revenue 

Service. Available at http://www.irs.gov/pub/irs-pdf/

p551.pdf (free download).

U.S. Department of Agriculture (USDA) Forest Service, 

National Woodland Owners Association, and University 

of Georgia. National Timber Tax Web site: http://www.

timbertax.org.

U.S. Department of Agriculture (USDA) Forest Service, 

Forest Tax Web site: http://www.fs.fed.us/spf/coop/

programs/loa/tax.shtml.

Wang, L.; Greene, J.L. 2012. Tax tips for forest landowners for the 2012 tax year. Mgt. Bul. R8-MB 141. 

Atlanta, GA: U.S. Department of Agriculture, Forest 

Service, Southern Region. Available at http://www.

fs.fed.us/spf/coop/programs/loa/tax.shtml and www.

timbertax.org (free download).