Land leases with cutting contracts involves firms leasing land for management and buying timber as it matures. There are periodic payments for land lease with payment for timber as it is harvested. Land lease payments are treated as ordinary income for tax purposes with timber payments as capital gains. Payment is made for timber as it is harvested, or there may be periodic maintenance payments with shortages made up as timber is harvested. The usual tax treatment of income is as capital gains.
Income is treated as capital gains.
As a result of increasing stumpage demand across the South, leases for timberland are becoming more common in the region. The practice increased as contracts for tree crops planted under the CRP began expiring in 1995. A natural extension of these leasing practices is currently being applied through the private sector for full-rotation tree crops targeted for the millions of marginal agricultural crop and pasture land in the U.S. South. Further, these lease offerings through the private sector could partially substitute for public policy programs designed to convert land use to long-term sustainable tree crops. Moreover, marginal lands converted from annual rowcrop and pasture production to tree crops can reduce soil erosion, improve water quality, and produce more profitable returns for the landowner.