Growing Value and Marketing for Profit

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1 Growing Value and Marketing for Profit Some Forest Management Ideas Learning Your Land and Objectives Getting FMV for Your Timber Rick Hamilton, Extension Forester, Retired

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4 Objectives of U.S Owners 1. Wildlife 2. Recreation 3. Residence 4. Timber Production 5. Soil/Water, etc. But 75% Require Income

5 Some Harvested Timber Products Pulpwood smaller pine or hardwood trees used for paper. Chip-n-saw intermediate size pines used for both paper and lumber. Sawtimber larger pines or hardwood trees used to cut into lumber. Veneer In areas where there are markets, these are the biggest and best-formed trees which can be peeled into thin layers. Poles and pilings In areas where there are markets, these are extremely straight pines used for utility poles, piers, etc. Biomass Wood used domestically or exported for energy production

6 Pine-High End Markets 14 + DBH 4-7 Growth Rings per inch Increased Summer Wood Minimal Taper Small and Confined Knots

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8 Spacing/Thinning/Rotation Loblolly Pine Initial Spacing 10 X 10 = 435 TPA Thin at Year to TPA Thin at Year to TPA Final Genetics are important! - Use the best genetics you can get for your location when planting-2 nd or 3 rd Generation Seedlings

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10 Quality Hardwood Goal is to Grow High Quality Sawtimber on Good Hardwood Soils Clear Straight Confined Knots Minimum DBH Higher Grade= Higher Value

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12 Hedging Strategy Grow Value Not Volume Don t Bet the Family Farm On Forestry- Diversify Investments Do Reasonable, Not Extraordinary High Cost Management Strive to Grow High Quality Stems Look for Hardwood Opportunities on Good Hardwood Sites

13 Expert Assistance is Recommended

14 Timber Sale Planning Lines must be painted or flagged and verified by L/O and their consultant L/O is certifying ownership of timber to be cut, whether under timber sale contract or deed. Survey may be required, but survey is deductible cost of timber sale, lessening the pain. If a neighbor trespasses on you, your compensation may depend on your verification of your line!!!!

15 BUT EVERYBODY KNEW THE FENCE WAS THE LINE GRANVILLE COUNTY, NC 3/4 miles (3960 ft) of supposed line based on fence, with line actually running an old road bed averaging 62 ft from fence 5.6 acres overcut/7.2 mbf per acre Timber Value (2002)= $1922/acre= $10,765 2X=$21,530 Seller Settled

16 A finished, maintained line looks like this

17 How does a consulting forester help you? Acts on your behalf and in your best interest Tells you how much timber you own and what it s worth Markets your timber to get you the best price possible Sets sale conditions that protect you and your property Keeps you out of jail

18 How Much and What is Your Timber Worth? Consulting Forester Cruise Species Products Volumes Value FMV = Equally Knowledgeable Parties Coming to an Agreed Upon Value

19 Selling by the unit Written contract Know merchandising Product specifications and prices in contract Mill tickets by product used to calculate payments

20 Lump Sum Sales Timber appraisals (cruises) are used to attract buyers and verify the final bids Competitive bidding reflects the true market value Timber deed passes title at time of payment and includes soil and water protection guidelines, etc. Usually results in more complete harvest, reducing reforestation costs

21 Factors Affecting Bids Mill specifications Mill inventory quotas Weather Mill performance Retail sales Competition s inventory Distance from mill Logging conditions Competition, competition, competition

22 Other Services Management plans Boundary line maintenance Reforestation advice Silvicultural prescriptions Wildlife habitat enhancement BMP installation and maintenance Basis determination Forest taxation

23 Some of You Won t Listen So Beware.

24 Beware of High-Graders Cutting all the big and best trees and leaving the smaller and worst trees is high-grading Devalues the forest Shifts to lower value species Cuts future profits Diminishes habitat Often a diameter limit harvest cutting all trees over 12 for example; too many thinnings are high-grades

25 Thinning favor growth on best trees improve health & beauty of trees manipulate tree spacing for sunlight, airflow, safety provide periodic income

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27 Get Professional Advice Use Registered Forester s (RF) Advice When selling timber use Consulting Foresters (CF) Advice RF + CF = FMV for Timber Professional Advice = Average 23% higher sale price for timber sold lump sum; 64% more per unit in negotiated sales.

28 Get Professional Advice Land is Left 120% More Productive Land is Reforested to Quality Species Matched to Soil Timber Sale Deed/Contract Protects Soil and Water Increased Oversight of Activities

29 Timber Sales Gross Income $50000 Costs of Sale (8500) Basis (21500) Net Taxable Income $20000

30 Timber Sale (cont.) Net Taxable Income $20000 Long-Term Capital Gains (LTCG) 1 Year Holding Period For Both Investors and Businesses Report on Schedule D (Investors) Report on 4797 (Business)

31 COST OF SALE Tree marking Scaling Cruising Temporary roads Consultant fees Legal fees Advertising fees Survey Etc.

32 Timber Basis Why is it important? Basis reduces timber sale proceeds Basis or FMV (whichever less)=loss Only the net amount is taxable (Tax Code 1001(a))

33 FMV of Property When the property is timber The FMV of timber means: Timber quantity Timber price on the date of death

34 An Example Joe inherited a timber tract in Louisburg 2 years ago. What is his timber basis?

35 Answer to the Example Timber quantity and price 2 years ago in Joe s land: Pine sawtimber 100 tons x $30/ton = $3,000 Pine pulpwood 200 tons x $6/ton = $1,200 Hardwood pulpwood 300 tons x $4/ton = $1,200 $5,400

36 Timber Basis For purchased property, timber basis is the purchase price plus acquisition costs

37 Timber Basis For gifted property, if no gift tax is paid, the basis is: (a) donor s adjusted basis (gain at disposal) (b) the lower of the donor s adjusted basis or the FMV (loss at disposal) ( 1015 and )

38 BACK CRUISE Use to establish a basis Allocates timber value at time of acquisition 4 step process 1. Determine present volume 2. Estimate growth over period since acquisition 3. Reduce present volume by growth 4. Volume past X stumpage past = Basis Note: Limited by purchase price or by FMV accepted by IRS

39 Reforestation Tax Treatment 1. First $10,000 is fully deductible 2. Write-off (84-months) of all amounts over $10, Both deductions taken as Adjustments to Income (no need to itemize) 4. Equally available to small businesses and investors. 5. Elected on a property by property basis each tax year. 6. May not include cost-share amounts excluded from income (IRC 126)

40 Cost Share - To Wait or Not? Reforest Immediately - No Cost Share $75 Cost/Acre ($18.75) Tax Deduction@25% $56.25 Net Cost

41 Parting Advice Hire a Registered Forester Consultant. Fire any consultant who does not understand timber taxes, especially basis. Add a CPA/Tax Attorney to your team. Include your family in all discussions. Estate and tax planning will help you sustain your forest land ownership and income.

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