Timberland Acquisition
There are some important details that should be considered after timberland has been acquired. Taking care of these up front can save you time and money later on.
Why is it important to develop a management plan?
A management plan is a way to bring together all of your long-term goals and objectives. Timberland is a long-term investment and conditions can change that may alter your original plan, so it is important to be flexible when developing this plan. The plan should be developed so that it will provide guidance on how to best manage your property to achieve some desired future condition or stream of benefits.
There are several cost-share programs that are available to timberland owners to help reduce some of the costs of managing their land however, qualification for these cost-share payments is generally contingent on having a management plan that meets certain criteria.
How do you put a management plan together?
Developing a management plan can be straight forward or rather difficult, a lot will depend on your goals and objectives, the current state of the property and how that relates to some desired future condition, the size of the property, and the resources at your disposal to implement and carry out the plan.
There is a multitude of State and private consulting foresters that can help you clearly define your specific goals and put them together in a management plan that is best suited for your property. These foresters can also provide advice on where to go and who to contact in your local area for help on carrying out a specific portion of your plan (timber stand improvement, timber sale, etc...).
How do you classify your timberland ownership?
The manner in which you decide to structure your timber activities, "for-profit" or "not for profit," will have an affect on what expenses are deductible and how losses are treated. Remember, it is the specific circumstances surrounding your timberland activities that should be considered before deciding how to structure your ownership.
Developing a management plan that shows a "for profit" motive with some prediction of those expected profits should be sufficient to raise the level of your activity to an investment. Thus allowing greater freedom on the deduction of management expenses, without the worries of the passive loss rules.
What type of records do I need to maintain?
Capital expenditures are the costs associated with the acquisition of property or property rights. By definition capital expenditures must be capitalized. This means that it is necessary to determine the basis for each of the assets associated with you timberland acquisition and establish separate accounts to record (and adjust as necessary) the basis. It is very important that accurate and up-to-date records are maintained for your timberland.
There are three primary accounts that need to be established:
Land Account - Assets placed in the land account(s) include the land itself, nondepreciable land improvements, and depreciable land improvements.
Timber Accounts - Three basic timber accounts may need to be established. These are merchantable timber, young growth, and plantation or deferred reforestation accounts. Each account should have the basis measured in dollars and the volume measured in some form of standard units.
Equipment and building accounts - Assets placed in these accounts include durable equipment such as sawmills, trucks, tractors, and power saws. Individual accounts should be established for each item or class of items.
Establish accounts allocating as much of the available basis as possible to those assets which will be disposed of first or can be depreciated.
For more information on the type of accounts to establish and how to set those accounts up click here!
File for property tax relief
One way to reduce some of the financial burden associated with owning timberland is through some form of property tax relief. Information on the programs that are available can usually be obtained through your states Department of Natural Resources (DNR) office. To see if there is a program available in your state click here!