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NB Information given here about the economics
and taxation of forestry investments is strictly
for general guidance and does not constitute investment
or professional advice. Prospective or existing
investors are strongly advised to seek professional
advice on all aspects of investment in forestry
and on its taxation, which is complex.
Capital
Gains Holding Requirements
Provisions
of a number of recent tax acts affect taxes on
income from timber sales.
The
Taxpayer Relief Act of 1997 reintroduced the concept
of preferential treatment for long-term capital
gains that had been eliminated by the Tax Reform
Act of 1986. It also increased the holding period
to qualify for long-term capital gain treatment,
created a new category of 'mid-term' capital gains,
and provided for a further reduction in the capital
gains tax for assets held five years beyond December
31, 2000.
The IRS Restructuring and Reform Act 1998 returned
the holding period for long-term capital gain
treatment to 12 months.
As
a result of the interaction between the two acts,
for timber sold after May 6, 1997, the tax rate
on long-term capital gains declined from 28% to
20% - or from 15% to 10% for amounts in the lowest
bracket. For timber sold between July 28 and December
31, 1997, the holding period to qualify for long-term
capital gain treatment increased from 12 to 18
months, with 'mid-term' capital gains from timber
held between 12 and 18 months taxed at 28%.
The
holding period returned to 12 months for timber
sold after December 31, 1997. For timber held
5 years beyond December 31, 2000, the capital
gains tax rate is scheduled to decrease another
2%, from 20% to 18% - or from 10% to 8% for amounts
in the lowest bracket.
A
technical correction made by the IRS Restructuring
and Reform Act of 1998 provides that, in most
situations, inherited property will be eligible
for the lowest applicable capital gains rate (i.e.
10% or 20%) because the property will be treated
as if held for more than 12 months.
For
a taxpayer in the 28% tax bracket or higher, the
five-year holding period only applies to assets
acquired after December 31, 2000. However, a special
election may allow property acquired before December
31, 2000 to be treated as having been acquired
on January 1, 2001.
In
order to take make this election the asset must
be treated as if it were sold on January 1, 2001,
at its fair market value as of this date. Any
income tax due on the gain from this hypothetical
sale must be paid. However if a loss were to result,
it is not recognized. As a result of this hypothetical
sale the basis of the timber is stepped up to
the fair market value that was was used for the
sale. If a loss had occurred from the sale the
basis in the timber would carryover from that
prior to the sale.
Effect
Of The Jobs and Growth Tax Relief Reconciliation
Act of 2003
The
Act impacted timber owners through a lower long-term
capital gains rate, lower marginal rates on ordinary
income and increased deductions for capital investments
by small businesses.
For
ordinary income the 10% and 15% rates stayed the
same. The 27% rate dropped to 25%, 30% to 28%,
35% to 33%, and 38.6% to 35%. These reductions
were effective retroactively to January 1, 2003.
The
maximum rate on net long-term capital gains dropped
from 20% to 15%, and the capital gains rate for
taxpayers in the 10% or 15% ordinary income brackets
fell from 10% to 5%. In 2008 this 5% rate fell
to 0%, but on January 1, 2009 the rates were due
to return to 20% and 10% because of sunset provisions.
In 2005/2006 the Bush administration was trying
very hard to delete them, and prior to the dramatic
reversal of the balance of power in Congress after
the mid-term elections, which gave the Democratic
Party control over both chambers of Congress for
the first time since 1994, was somewhat successful
(for more on which, see below).
Effect Of The Tax Increase Prevention
and Reconciliation Act of 2005
The
2005 Act extended the life of the 15 percent rate
of tax on most capital gains and qualifying dividends
for two years until the end of 2010, preventing
a tax increase at the start of 2009. The rate
would be reduced to zero in 2008 for taxpayers
in the 10- and 15-percent tax brackets, as previously
stated. These measures were expected to cost $20.551
billion over 5 years and $50.783 billion over
10 years.
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