Timber Taxes and Forest Estate Considerations

1. Timber Taxes and Forest Estate Considerations Mark Megalos, NC State University, Forestry Extension

2. THIS TALK • TIMBER TAX BASICS • CAPITAL GAINS, • BASIS, • REFORESTATION • FOREST ESTATE CONSIDERATIONS • EXAMPLES • RESOURCES • SUMMARY

3. Important Timber Times Selling Timber Cost of Sale - Deductible Timber Basis – Deductible Preferential Tax Rate Purchase/Inheritance Timber Basis Replanting Reforestation Tax Deduction

4. Timber Sales Gross Income $50000 Costs of Sale (8500) Basis (21500) Net Taxable Income $20000

5. COSTs OF SALE Tree marking Scaling Cruising Temporary roads Consultant fees Legal fees Advertising fees Survey Etc….

6. Timber Sale (cont.) Net Taxable Income $20000 Long-Term Capital Gains (Timber Qualifies for LOWER TAX RATE)* *1 Year Holding Period

7. Timber Sale (cont.) WHERE TO REPORT IT Report on Schedule D (Investors) Report on Form 4797 (Business)

8. LTCG Rates (2014) Income*Ordinary RateLTCG** $0-18,050 10% 0% $18,051-73,800 15% 0% $73,800-148,850 25% 15% $148,851-226,850 28% 15% $226,851-405,100 33% 15% +3.8 $405,101-457,600 35% 15% +3.8 $457,600 + 39.6% 20% +3.8 *Married Filing Jointly 3.8 % NIIT Tax (high income folks)

9. BASIS • COST of ACQUISITION • FAIR MARKET VALUE ( INHERITANCE) • GIFT – BASIS of FORMER OWNER • DOCUMENTED COSTS to GROW • What is one USES the Reforestation Credit?

10. Timber Sales RECAP Gross Income $50000 Costs of Sale (8500) Basis (21500) Net Taxable Income $20000

11. ESTATE CONSIDERATIONS

12. What Will Happen With Your Forest Estate? • Has your land appreciated significantly? Will it in the future? • Does land have development potential? • Is it Pressured by growth? • Do Heirs Have Any Interest in It?

13. What Are Your Future Goals? • Have you thought about a transition plan? • Have you considered the fate of your estate? • Stuck on Where to Start? • Overwhelmed?

14. Let’s Start Narrowing Your Goals ! • Do you need or want to cash in on your land value? • Do you want to protect the land / timber? • Do your children want to protect the land from subdivision and development? • Would you like to give all or part of your Land / Timber $$ to charity?

15. New Guide ( Spring ‘15) See me for a draft copy!

16. Potential Estate Option #1 WILL A last will and testament is the simplest and least expensive method of active estate planning. • Avoids loss of income and tax benefits • Peace of Mind • Sound, Cool-headed, Deliberate

17. Potential Estate Option #2 Partnership - or LLC Mechanism to share ownership while keeping land intact. Liability differs by type. • Undivided interest in assets  • Can Simplify Gifts (Shares vs Acres) • Can be established Now (to test viability) or Later ( control while here)

18. Potential Estate Option #3 Sell or Gift to Heirs Immediate transfer options for TODAY. LAND or TIMBER or BOTH. • Gifts – Retain your Basis • Sales- Establishes new FMV Basis • Can SELL Timber NOW and share $$ as Gifts @ $14 K /year

19. Potential Estate Option #4 Conservation Easement Maintains ownership while restricting development, subdivision for term or forever. • Tax Benefits • Potential for Revenue • Can Reduce Estate Valuation • Provides for Certainty beyond your life.

20. Potential Estate Option #5 Sale to Public Entity Direct Sale or “Bargain Sale” to public entity. • Immediate Revenue • Potential Tax Avoidance- Bargain • Solves Potential Estate Problems • Provides Finality

21. Potential Estate Option # 6 Institutional Planned Giving: Multiple options exist to donate real estate while providing annuity returns for retirement. • Gift annuity, deferred gift annuity • Annuity trust, unitrust, • Sale, or gift and sale.

22. Potential Estate Option # 7 Al a Carte Selection of Options 1-6 • Remember Each Estate Plan in UNIQUE • Matches Your Objectives • Online Calculators abound to “test the waters” before you decide

23. Many Hands Make Light Work

24. Get Started Now! • List All Assets: Accounts,Insurance Policies, Mutual Funds, Retirement Accounts, Business interests, Partnerships, Real estate (appraisals) • Name/Address/Phone of attorneys, accountant, financial advisor, insurance agent, next-of-kin or preferred contact • Separate list of preferences of final arrangements

25. GET YOUR FILES IN ORDER

26. Put A Team Together Now! Seek professional help! Attorney ( Estate Specialist) Banker / Trust officer (as needed) CPA / Tax Advisor / Estate Planner Insurance representative

27. Institutional Help is Available: • Many Colleges, Churches, Universities and other Non-profits have Estate Planning if a portion or majority of your estate is left to them. • A range of options are available depending upon your needs: Life Income Gifts, Charitable Remainder Trusts, Retained Life Estate, etc.

28. Remember: • Estate Planning Isn’t A D-I-Y project • Estate Plans = Ongoing Process • Choose an Administrator • State Your Preferences

29. Remember: • You won’t take it with you!!! • But, YOU can plan and ensure a smooth transition for family, friends and your causes NOW • Your Gov’t has a plan if you don’t make one!

30. http://www.srs.fs.fed.us/pubs/ah/ah_srs731.pdf

31. http://www.srs.fs.fed.us/pubs/gtr/gtr_srs112.pdf

32. Resources: • http://www.timbertax.org/ • Your land, Your legacy • https://masswoods.net/sites/masswoods.net/files/pdf-doc-ppt/ylyl_web.pdf • TIES to the LAND • http://tiestotheland.org/articles-land-owners • Running Successful Farm-Family Meetings • http://umaine.edu/publications/4802e/

33. THANK YOU!!!

34. QUESTIONS?: Mark Megalos Extension Associate Professor   Ph.D. NCRF #728 ph; 919.513-1202 fax: 919.515.6883 mamegalo@ncsu.edu