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Capital Gains Determination

Timber held as an investment

Lump-sum Sale - A lump sum sale is the outright sale of standing timber for a fixed dollar amount agreed upon in advance. The sale price is not a function of the volume cut. The holding period for a lump-sum contract runs from the date the timber was acquired to the date the sale contract is executed, usually the date it is signed. The timing of payments is not relevant to this determination. However, payments under a lump sum contract are reported in the tax year they are received.

Pay-as-cut Sale - A pay-as-cut transaction is one in which you were paid for the timber as it was cut usually based on a dollar amount per unit of wood sold. The holding period for a pay-as-cut contract runs from the date the timber or contract right to cut timber is acquired until it is considered to have been cut. The date of disposal is the date the timber is cut. Timber is considered to be "cut" at the time when in the ordinary course of business the quantity of timber felled is first definitely determined. Loggers in almost all regions of the country follow a more-or-less standard procedure. In the west, logs may pass through a roadside scaling station licensed by the state to scale logs and provide a scale ticket acceptable for all commercial transactions. More commonly logs are scaled or weighed at the mill purchasing them and/or at the log landing (where logs are stacked in the woods) by the logger or the hauler. IRS regulations specify that deviations from the standard practice to obtain a tax advantage are not acceptable.

If you held the timber for more than one year:

Timber held as an investment for more than one year, sold as a lump-sum or pay-as-cut sale would qualify for long-term capital gains treatment. The gain is reported on Schedule D Part II of your personal Form 1040. On Schedule D the gain or loss from the timber is netted against other gains and losses. You may also be required to file Form T, Part III.

If you held the timber for less than one year:

Timber held as an investment for less than one year, sold as a lump-sum sale or pay-as-cut sales would qualify for short-term capital gains treatment. The gain is reported on Schedule D Part I of your personal Form 1040. The gain or loss from the timber is netted against other gains and losses. You may also be required to file Form T, Part III (even if you are not required to file Form T, we recommend to complete Form T, Part III as part of your tax records).

Note the provisions of section 631(b) apply only to an owner of timber who must have a right to cut timber for sale on his own account or for use in his trade or business in order to qualify (Sec. 1.631-2(e)).