Exchanging sizeable timber sales for land could cut tax bill

By Jim Griffith
Registered Forester #1616

What goes around comes around. I usually hear this in regard to one person taking advantage of another, meaning that one day the person taken advantage of will have the opportunity to return the favor.

The “goes around comes around” statement does not usually apply to government, especially the IRS. However, there might be one exception – the 1031 Tax-Free Exchange for real property. This ruling has always allowed a seller to sell or exchange “like-kind” real property without tax consequences. A number of years ago my father-in-law was able to take advantage of this favorable tax law when he sold a property he had owned for years. He originally paid only a few thousand dollars for the property that eventually sold for tens of thousands of dollars. Instead of selling outright, he found another property for investment purposes and did a 1031 Tax-Free Exchange, saving tens of thousands in taxes.

There were attempts to swap ‘timber only’ for land when the 1031 Tax-Free Exchange ruling first came out. A few aggressive individuals were successful in completing these transactions before the IRS shut them down. Now, according to my legal council, the IRS allows the tax-free exchange for like-kind property and leaves it up to each individual state to define like-kind property. In Georgia, standing trees (timber) are considered real property and are eligible for the tax-free exchange for land.

I recently sold a sizeable tract of timber for a landowner in South Georgia. He was in the process of buying a tract of land and was advised by his legal council to turn the timber sale into a tax-free exchange for his new land purchase. On a $200,000 timber sale, even at capital gains tax rates, a tax-free exchange results in a substantial savings for the timber seller.

This is a great opportunity for a timber owner with interest in buying land. Should you decide you want to do a tax-free exchange, you will want to discuss this with your accountant and legal council. There are some orderly steps to make in this procedure and appropriate wording to include in a purchase and sale agreement.

Jim Griffith is the General Manager of Georgia Farm Bureau Timber and Real Estate Company

Georgia Farm Bureau News – July 2006

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