Timberland Qualifies for a 1031 Exchange
Posted by Andy Gustafson on Tue, Sep 07, 2010
Capital gain triggered from the sale of timberland can be deferred in a 1031 exchange by replacing into other real property. The fact pattern must reflect the property is held either for investment or for use in a business. Property held for sale is not the same as held for use in business or investment.
IRS Revenue Ruling 78-163 and Private Letter Ruling (PLR) 8621012 allowed the exchange of timberland for raw land. In Revenue Ruling 72-515 and PLR 200541037 a "simple fee" interest in timberland was determined to be "like-kind" and exchangable with a scenic conservation easement.
Timber Deed
A timber deed can be exchanged separate from the timberland deed but must be structured carefully to avoid a carve out. In Technical Advice Memorandum 9525002, the IRS ruled that interests were not the same in an exchange of standing and cut timber for a fee interest in three parcels of timberland. The timber deed was for standing and cut timber harvested in a two year contract, representing a limitation on the quantity of trees harvested.
Conclusion
State law determines whether standing timber is considered personal or real property. Personal property can not be exchanged for real property and vice versa. When selling timberland, seek the guidance of your attorney and or accountant and discuss whether the transaction should be treated as a Section 631 transaction. Section 631 allows the timberland owner to treat the sale of timber as either a sale or exchange given the timber has been held for a minimum of one year.
Foreign investors owning timberland can also participate in a 1031 exchange by complying with the Foreign Investment in Real Property Act of 1980 (FIRPTA).
Allow us to feature your timberland on www.atlas1031.com.