Form of Disposal
Standing Timber (Stumpage) - Income from the sale of standing timber (stumpage) that is sold outright for a lump-sum amount qualifies for long-term capital gains treatment if the timber is held for more than one year and is classified in any of the following ways for tax purposes:
- a "capital asset" in your hands, a Section 1221 transaction reported on Schedule D, or
- held for use in your trade or business, a Section 1231 transaction reported on Form 4797, or
- held primarily for sale to customers in the ordinary course of a trade
or business, a Section 631(b) transaction, reported as a Section 1231 transaction
on form 4797.
WARNING: If the sale occurred before January 1, 2005, an outright sale of timber held primarily for sale to customers in the ordinary course of a trade or business does not qualify for capital gains treatment. You would have had to sell it with an economic interest retained to qualify.
Pay-as-Cut Disposal (Economic Interest Retained) - If you dispose of standing timber using a pay-as-cut contract, referred to as a disposal with an economic interest retained under the provisions of Section 631(b), the income is reported in the year received in the same manner as an installment sale. It is reported as a Sec. 1231 transaction on Form 4797 using the gross profit percentage.
Cut Products - Income from the sale of timber in a form other than stumpage is ordinary income unless the taxpayer qualifies for and elects to "treat the cutting as a sale" under section 631(a) of the Internal Revenue Code. This allows the portion of the income attributable to the holding of the standing timber up to the point of its cutting to receive capital gains treatment.