View Full Version : Logging tax question, tax guru's please!

07-31-2010, 05:18 PM
I was asked a tax question today, which I had never heard so I was hoping for some help.

Here is the situation...
A man had some personal property logged. He was paid 10K for the wood. How will this affect personal income tax? Will the income from the wood be subject to capital gains, or will this just be personal income?

This man also has a business. If this money is subject to capital gains could he invest the money in his business to escape the capital gains tax?

Thanks for you help!


08-01-2010, 10:00 PM
Let me make sure I have these facts right... A client had some trees cut down at his home, and was paid $10,000 for the timber. He is not in the business of logging.

The $10,000 would be subject to LTCG treatment. I'd also reckon his basis would be zero, unless he incurred any personal expenses in the disposition of the timber. So if he paid for a permit, etc., I would say that'd increase his basis and reduce the gain. %

That money may be reinvested into his business, but it won't prevent the taxation of the timber. Those are two unique transactions. Even if the business owned the land, the business would be responsible for reporting the capital gain on its tax return (which may or may not flow through to the shareholder/member/partner, etc.)

Depending on his income, if he's in the 10-15% tax bracket, he'll pay nothing on the capital gain. If he's in the 25-35% brackets, he'd pay 15%, which is still better than the 10%/20% capital gain rates that'll be in effect for next year. Unless Congress acts on it... who knows :)

The only thing you can predict with Congress is when their vacations will be.

08-03-2010, 12:32 PM
You have the fact correct. This was personal property of he and his wife, not of his LLC. His main concern is 15-20% tax and how to avoid it...
I suppose the best way is it reduce income as much as possible during tax time and hopefully this will get him into the 10-15% bracket(if he is not there already).


08-03-2010, 01:07 PM
You can't avoid it being taxed. The fact it is treated as a capital gain is even better, because it gives him preferential tax treatment, and potentially no tax due if he's in the 10-15 percent bracket.

08-03-2010, 02:08 PM
Could the purchase price of the land be used to determine a basis above zero? The purchase price of the land would include both the land and the value of the timber at the time of purchase.

08-03-2010, 02:57 PM
If the land was purchased with the intent of selling the timber -- maybe. You could also determine whether the FMV of the property after the sale shows a decline as a result of this sale, to the extent it doesn't produce a capital loss.

If the property was worth $300,000 before the sale of timber, and now after it is $295,000 -- then you could probably include $5,000 in your basis. Though expect the IRS to question that, so an appraisal would be required to substantiate the amount. If the FMV of the property increases as a result of the removal of timber, then you still have no basis because it provided you a benefit.

Business Attorney
08-03-2010, 11:16 PM
The $10,000 would be subject to LTCG treatment.

That is correct if he owned the tree for at least a year. If he just bought the property and then had the tree removed, I think the gain would need to be treated as short term capital gain.

08-04-2010, 09:32 AM
That is correct if he owned the tree for at least a year. If he just bought the property and then had the tree removed, I think the gain would need to be treated as short term capital gain.

If he held the home for at least a year, correct -- LTCG, otherwise, STCG. If the property was inherited or gifted, you have another story. :)

08-04-2010, 02:48 PM
I talked with him a little yesterday. He is in the 10-15% bracket, so I think that he is going to be fine. I appreciate all your help, guys!