How should I report income from selling timber on my farm property?

Thanks for the detailed response. This was definitely a lump-sum sale - the timber company paid me one payment for all the standing trees. I've owned the farm for about 9 years, so definitely over the 1-year mark. I'm not in the timber business at all - this is the first time I've harvested any trees from the property. Would I need to subtract my "basis" in the timber from the sale price? And if so, how do I figure out what that basis would be since I bought the whole property (land and trees) together?

Yes, you'll need to determine your basis in the timber to calculate your gain correctly. Since you purchased the land with the timber on it, you'll need to allocate a portion of your original purchase price to the timber value. The ideal approach would be to look back at your records from when you purchased the property. Sometimes the purchase documents include a timber cruise or appraisal that allocated value. If you don't have that, you might need to work with a forestry consultant who can help you establish a reasonable basis through a method called "depletion". They can estimate what the timber was worth when you purchased the property. For reporting, since this was a lump-sum sale and you've held the property for 9 years, you'll report it as a long-term capital gain on Form 8949 and Schedule D. The difference between your allocated basis and the $67,000 sale price will be your capital gain. This approach should result in the most favorable tax treatment.

Does it work if I've never tracked my basis in the timber before? I inherited some forest land about 5 years ago and have no idea what the timber was worth at the time I received it.

I'm skeptical about these online tools for specialized tax situations. How does it actually establish basis for timber when you've owned the land for years? That seems like it would require professional forestry knowledge, not just tax algorithms.

It actually handles inherited property situations really well. The system asks you when you inherited the land and uses historical timber price data for your region to help establish a reasonable basis. It's pretty sophisticated with natural resource depletion calculations. For establishing basis on property owned for years, it uses something called "retroactive basis determination" where it can work with either your original purchase documents or, if you don't have those, it can use historical regional timber prices and growth models based on the species and age of your trees. They partner with forestry databases to make these calculations legitimate. I was impressed because it handled all the technical aspects without me needing to become a forestry expert.

Wait, I don't understand how this works. They just sit on hold for you? How do they transfer the call to you and what happens if you're not available when they get through?

This sounds like a scam. The IRS would never let a third party service jump the phone queue. I bet they're just collecting your data or charging you for something you could do yourself.

They don't actually jump the queue - they just do the waiting for you. The way it works is they have a system that calls the IRS and navigates the initial menu options to get into the right department's hold queue. Their system then waits on hold (sometimes for hours), and when they detect a human has picked up, they call your phone number. When you answer, there's a brief automated message saying they've reached the IRS, then they conference you into the call so you're directly speaking with the IRS agent. As for availability, they text you updates about your estimated wait time, and they also confirm you're ready before they make the initial calls. I was skeptical too, but it's a legitimate time-saving service, not a scam. They don't access your personal tax information at all - they're just connecting the call and then you handle the actual conversation with the IRS yourself.

I hadn't heard about Form T! Is that something everyone has to file with a timber sale, or only people who are regularly in the timber business? And do you know if using that form changes how the income is taxed?

Form T is technically only required if you're regularly in the timber business or claiming a timber depletion deduction. For a one-time sale like yours, it's optional - but I always recommend completing it anyway as supporting documentation. Using Form T doesn't change how the income is taxed - it's more of a detailed record-keeping form that substantiates your basis calculations and depletion deductions. It provides a paper trail showing how you determined your timber basis, which is extremely helpful if you're ever questioned about it. Since determining timber basis can be somewhat subjective when you bought the land with timber already on it, having this documentation shows you made a good-faith effort to calculate everything properly.

I tried using TurboTax for my timber sale last year and it was a nightmare. The program doesn't have specific guidance for timber sales and kept trying to categorize everything as either business income or simple capital gains without the proper 1231 treatment. I ended up having to override several calculations manually.

That's really valuable advice about documenting the sale-related costs! I hadn't thought about things like road maintenance being deductible. Do you know if there's a specific form or schedule where those costs should be reported, or do they just reduce the gross proceeds when calculating the gain on Form 8949? Also, regarding the professional timber cruise for retroactive valuation - roughly what did that cost you? I'm trying to weigh whether it's worth the expense for establishing a solid basis, especially since I'm dealing with a $67,000 sale.