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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 two recent tax acts, the Taxpayer Relief Act
of 1997 and the The IRS Restructuring and Reform
Act 1998, affect taxes on income from timber sales.
The
1997 act 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
1998 act 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.
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