Timber sale taxes: how a harvest is taxed in 2026

Three ways timber leaves your land, three tax results

Timber owners sell in one of three ways, and the Code handles each differently:

1. Lump-sum (outright) sale of standing timber. You sell all the designated trees for a fixed price, usually after a sealed-bid sale run by a consulting forester. If you held the timber more than one year, the price minus your depletion basis is treated as gain on the sale of timber under IRC 631(b), and it is Section 1231 gain or capital gain depending on whether you hold the land in a business. The sale date is the disposal date.
2. Pay-as-cut contract. The buyer pays per ton or per thousand board feet as trees are removed, and you keep an economic interest. Same 631(b) treatment, but the disposal date is the date each tree is cut, so gain falls in the tax year of cutting (IRC 631(b)).
3. Cutting it yourself. If you harvest and sell logs or lumber, the profit is ordinary business income unless you elect under IRC 631(a). The election treats the cutting as a sale: the timber's fair market value on the first day of the tax year, minus depletion basis, is 1231 gain, and that value becomes your cost for the later log sale.

Long-term gain is taxed at 0%, 15% or 20%, the top rate starting at $613,700 of taxable income for joint filers (Rev. Proc. 2025-32, 2026); the full table is on the capital gains hub. Georgia, our example state, adds a flat 4.99% in 2026 (Georgia DOR) with no timber-specific income tax break.

Depletion basis: the number most owners leave blank

You do not pay tax on the whole check, only on the amount above the basis of the timber you sold. That basis lives in a timber account. When you bought or inherited the land, its cost or date-of-death value should have been split among bare land, merchantable timber, young timber and improvements by relative value. The timber account is then turned into a per-unit rate: depletion unit = adjusted basis in the account divided by total timber volume. IRS Publication 225 (2025 edition) walks through a tract with $24,000 of timber basis and 300,000 units, a depletion unit of $0.08; cutting 27,000 units yields $2,160 of depletion.

Inherited land is where this pays most. In our example the heirs commissioned a retrospective cruise valuing the merchantable pine at the date of death, which gave them $60,000 of basis to deduct. Without that work many owners report the entire sale price as gain. A forester can reconstruct basis years later, but it is harder and less defensible.

The 631(a) election for owners who log

A landowner who cuts his own timber and sells logs has ordinary income on the whole margin unless he elects 631(a). In our example the election changes the federal income tax by $30,433: the same $340,000 of stumpage value is taxed at long-term rates instead of ordinary rates. The logging margin above stumpage stays ordinary either way.

The election requires that you owned the timber, or held the contract right to cut it, for more than one year before cutting. It covers all timber you own or have a right to cut, and it binds you for later years unless the IRS permits a revocation for undue hardship (IRC 631(a)). Because the gain is measured on January 1 values, a sawmill owner in a falling market can lock in a higher stumpage figure than the logs eventually fetch, and the gap becomes an ordinary loss on the log sale.

Lump sum or pay-as-cut: timing and risk

The two contract forms produce the same character of gain but different timing. A lump-sum sale puts all the gain in the year you sign and are paid. A pay-as-cut contract spreads it over the years the logger actually works. In our example the lump sum adds $74,281 of tax and the two-year pay-as-cut adds $67,676, a difference of $6,605, mostly because less gain is exposed to the 3.8% investment income tax under IRC 1411 (2026 threshold $250,000 for joint filers, not indexed) in each year.

Pay-as-cut has trade-offs on the ground: volumes are measured at the mill, so you need scale tickets and an honest buyer, and a wet season or a mill closure can push cutting into a year you did not plan. Many foresters prefer lump-sum sales because the buyer bears the volume risk. If you want lump-sum certainty and spread tax, a lump-sum price paid partly on a secured note can be reported on the installment method, since timber is not inventory for an investor.

Reforestation costs and their recapture

Replanting is the one timber cost the Code rewards quickly. Under IRC 194, each owner can deduct up to $10,000 of reforestation costs per qualified timber property each year ($5,000 if married filing separately), and amortize the rest over 84 months beginning in the second half of the year the costs are incurred (IRC 194(a), (b), unchanged for 2026). Site preparation, seedlings and planting labor qualify.

The catch arrives at harvest. Those deductions and amortization are treated like depreciation for recapture: if you sell the timber property within roughly 10 years, gain up to the 194 deductions is ordinary income under IRC 1245, with amounts tied to basis acquired before the 10th preceding tax year excluded (IRC 1245(b)(7)). Pine thinned at year 12 to 15 usually escapes; a quick resale of a freshly replanted tract does not.

Paperwork, the investment income tax and where Hans helps

Form T (Timber) must be filed for any year you claim depletion, make the 631(a) election, or make an outright sale under 631(b), unless you only have an occasional sale, which the instructions define as one or two sales every 3 or 4 years (Instructions for Form T). Sales go on Form 4797 if you hold timber in a trade or business and on Schedule D if you are an investor.

Investors owe the 3.8% net investment income tax on timber gain above the threshold, as our first example shows ($7,980). An owner who materially participates in a timber business is outside it on gain from property used in that business. A large harvest can also be paired with loss harvesting, a 1031 exchange of the land and timber together into other real property, or a charitable remainder trust. Get the Big Sale Tax Analysis at /analysis/ to model a lump sum, a pay-as-cut contract and an installment note side by side.

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