During periods of drought some farmers view timber sales as a way to improve their cash flow. Selling timber during periods of economic distress is a good way to generate income, but it is important to realize that such sales may also result in a tax liability. The amount of liability depends on the sales volume, the basis or cost in the timber sold, and the sellar's other taxable income of the farmer.
Most farmers hold timber as investment property.
Therefore, income from the sale of standing timber can qualify as a long-term capital gain for federal income taxes, depending on how long the timber has been held. Timber must be held for more than one year before cutting in a stumpage sale to qualify for long-term capital gains. To determine the holding period, begin counting from the day of purchase or acquisition. Normally, the purchase date is the day title was transferred. For most farmers, standing timber qualifies as a capital asset.