Hedging Against Inflation with Forestry
Written By Kaden Hackney | EA, CPA Candidate & BEC Tax Strategist
Is Your Investment Portfolio Barking Up the Wrong Tree?
Ever heard of the ‘Green Gold Rush’? Well do I have something to share with you today! Lately the economy has left many Americans feeling violated by the cleft hooves of inflation. But what if there was a way to root your investments in these shifting sands?
Enter the world of forestry investment, a realm where money literally grows on trees! Let’s take a peep at Mother Nature’s secret to see how a blend of sustainable practices and tax incentives can keep you out of inflation’s motel sheets.
Tax Strategies
Forestry offers a plethora of interesting tax strategies for investors to capitalize on. Let’s look at a few below:
Basis & Depletion
When acquiring your timberland, it is important to consult a professional forester who can help you establish the value of your standing timber. A portion of your land acquisition price will be assigned as timber value and becomes what is called ‘asset basis’. The tax code provides a depletion allowance of that asset basis that can help lower your taxable income the year you cut down standing timber.
Long Term Capital Gain Treatment
Timber, whether cut or standing, can receive long term capital gain treatment for tax purposes after a one year holding period. Long term capital gains rates are generally lower than ordinary income tax rates and can provide significant tax savings to investors.
Reforestation Expenses
Perhaps at acquisition you plan to develop additional timber stands or you will be harvesting soon and replanting a current stand, in both cases the tax code allows investors to expense up to $10,000 of these expenses which can include:
Site Preparation Costs
Tree Seedling Purchases
Planting Expenses
Protection and Maintenance
Post-Planting Fertilization
Pre-Commercial Thinning
Professional Consultation Fees (directly related to reforestation)
Anything above and beyond the $10,000 limit each year will be amortized over 84 months and provide additional tax savings over time.
Management Expenses
Investors can also take advantage of ordinary and necessary forest management expenses such as property taxes, insurance costs, professional fees, equipment and more when they decide to run the activity as a business.
Conservation Easements
An investor may want to establish a legal contract with the government to restrict the forestry land from development or to use the land for conservation purposes. By doing so, investors may receive a significant charitable contribution deduction which can provide significant tax savings while preserving the land’s ecological and aesthetic value.
Forest Management Plan
While risk exists in all investments, there is certain due diligences investors can take to curb some of that risk. When acquiring private forestry, it is important to consult a trifecta of professionals including Professional Foresters, Attorneys, and CPAs.
A professional forester will be a huge asset to your forestry investment. Their skills and expertise will help investors to:
Define Landowner Objectives
Value and Account for Forest Inventory
Maintain Forest Health
Implement Forestry Management Best Practices
Preserve Ecological and Wildlife Balance
Follow Legal and Regulatory Requirements
Monitor and Update the Plan
Consulting an attorney with forestry and real estate experience can help you manage the risks of your investment. Your attorney should be able to assist you with land acquisition, zoning and land use regulations, environmental regulations, timber sales contracts, boundary disputes, easement and access rights, conservation easements, and insurance as well.
Your CPA should bring these tax strategies we discussed to life and help you recognize the tax benefits of your
investment through accounting, tax planning and preparation, and financial strategy advisement.
Finance Opportunities
Today there are many federal and state sponsored programs to finance forestry investment. These programs aim to promote sustainable forestry practices, support rural economies, and conserve critical habitats. A few of the federal USDA programs include:
• Farm Service Agency (FSA) Loans
• Forest Legacy Program (FLP) Grants
• Conservation Reserve Program (CRP) Grants
• Environmental Quality Incentives Program (EQIP) Grants
In addition to these highly advantageous programs, there exists conventional loans (not dissimilar to the real estate industry) and each state also has its own list of low-interest loans, grants, and cost-share assistance programs.
Conclusion
Build your team, find your investment, and reap the rewards. It’s that simple.
