How Should I Treat Timber Sale Income for Taxes?

Eli Moore
Oct 29
2 min read

The University of Kentucky Cooperative Extension Service wrote a detailed article on how timber harvest should viewed under our tax laws. We encourage you to check it out as it could save you a reasonable amount of money during your next harvest. Below the document is a ai summarized outline.

Summary: Tax Options for Timber Revenue

Selling timber is something most landowners do rarely, so understanding how to minimize taxes on timber income is essential. The way you sell timber—and how you report it—can significantly change the amount of tax you owe.

Key Goal

Pay the lowest legal amount of tax by:

Selling timber in a way that qualifies for long-term capital gains.
Calculating gain using a method that minimizes taxable income.

Capital gains are beneficial because:

The tax rate is lower than ordinary income.
Capital gains are not subject to self-employment tax.
Savings can be several thousand dollars on a typical harvest.

How to Qualify for Capital Gains

To claim timber income as long-term capital gains:

You must have owned the timber at least 12 months.
You must “release your interest” in the timber before it is cut.

What NOT to do

Selling on shares (percentage of mill check) does not qualify for capital gains. IRS sees this as you selling logs, not standing timber—so it's ordinary income, reported on Schedule C or F.

What TO do

Sell timber:

Lump sum (one price for all timber), or
Per-unit (a fixed $/ton, $/MBF, etc.)

Either method qualifies for capital gains, reported on Schedule D.

Calculating Capital Gains

Two calculation methods exist:

A. Simplified Method

Net Gain = Amount Received – Expenses(Expenses include consulting forester fees, legal fees, boundary marking, etc.)

Easy but does not reduce taxes as much as the next method.

B. Allowable Basis Method (Best for Reducing Taxes)

Net Gain = Amount Received – (Allowable Basis + Expenses)

The allowable basis (also called depletion allowance) reflects the original value of the timber when you acquired the land. A consulting forester can determine this by estimating timber value at acquisition (“back-growing” the stand).

This method often significantly lowers taxable gain, especially if:

Timber was mature when you acquired the property.
You bought the land recently.

Reporting Requirements

Shares sale → Report on Schedule C or F as ordinary income.
Lump-sum or per-unit sale → Report on Schedule D as capital gains.
Landowners with ongoing forestry operations may need Form T.

Where to Get More Information

The fact sheet points to additional resources including:

National Timber Tax website
IRS forms and instructions
Kentucky state tax forms
University forestry and timber-harvesting resources

We encourage you to take this information to your tax expert.

Eli Moore, Consulting Forester

10/29/2025