For most farmers, standing timber qualifies as a capital asset. Therefore, any gain from the sale of standing timber held for the appropriate time represents a long-term capital gain. There are two reasons why timber sales resulting in long-term capital gain income result in less tax. The maximum tax rate on capital gain income is 28 percent, while ordinary income from the farming operation may be taxed at higher rates. In addition, if the timber qualifies for capital gain treatment, the income is not subject to self-employment tax.
Most farmers sell standing timber for a lump sum.
In a lump-sum sale, the owner sells standing timber for a fixed price agreed upon in advance. Generally, the value is determined by estimating the volume of usable wood products from standing timber. The sale may cover a given acreage, certain species, or certain diameter classes. Because this method of selling timber is relatively simple, it is the one farmers use most often. For landowners who hold timber only as an investment and make infrequent sales, any gains from a lump-sum sale of timber should qualify as capital gains income.