Is a Timber Deed Eligible for a 1031 Exchange?
Posted by Andy Gustafson on Thu, Sep 02, 2010
Is a timber deed reverting to the Seller after a fifteen year period eligible for a 1031 exchange? The timber deed conveys the right to harvest standing timber for a period of time. Access to the land is granted along with rights to an unlimited harvest followed by reforestation.
Interesting question that family and corporation forest owners consider when determining how best manage their woodlands. According to Dr. William Hoover, Professor of Forestry at Purdue University and co author of Timber Tax Management, a detailed review of timber tax issues, "The nation's 10 million family forest owners account for 62 percent of the forestland in the United States, about 400 million acres."
1031 Exchange Eligibility
To be eligible for a 1031 like-kind exchange, the property must be held for qualifying use, either as an investment or in a business. Next, the interests in the old property and the new property must be of similar nature or character. Fee simple is the common form of real property ownership and is not limited to a specific period of time. Given the timber deed is for fifteen years, the right represents a carve out. If the term included five year increments exceeding thirty (30) years or more, the timber deed would most likely qualify for a 1031 exchange given the IRS recognizes 30 year or more leasehold interests as real property.
Conclusion
When considering the sale of timberland or timber, seek the guidance of a tax professional. If the outcome is to defer the gain in a 1031 exchange, call to engage us as the qualified intermediary. We work with individuals and corporations, domestic and foreign.
