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1031 Exchanges of Timberland and/or Timber

To qualify for tax deferral under Internal Revenue Code 1031, both the property relinquished and the property acquired in the exchange must be “like kind” and the taxpayer must hold the properties “for productive use in a trade or business, or for investment.” Property held primarily for sale is not held for use in a trade or business or for investment. With respect to real estate, the IRS and courts have construed the “like kind” requirement broadly such that an interest in a parcel of real estate is generally like kind to all other interest characterized as real estate under state law, whether such real estate is improved or unimproved.

Subject to a few exceptions, real estate will be considered like kind regardless of the use put to the land. Thus, a fee interest in raw land can be exchanged for a fee interest in parcel improved with a commercial building or a parcel with standing timber. See e.g., Rev. Rul. 78-163 approving an exchange of timberland owned by a producer of forest-related products for bare land of lesser value owned by a state. Ordinarily, growing timber is considered part of the land. Thus, the quantity, quality, age and/or species of timber may relate to the grade or quality of the timberland, but does not impact the question whether the timberland is like kind to other real estate, whether or not the replacement land is timberland.

Despite the generous definition of like kind in the context of real estate, however, there are a few areas where some care is warranted to ensure that the like kind requirements are satisfied. One such area is an exchange of an interest in land for an interest in cut timber or timber to be cut. in a 1995 Technical Advice Memorandum, the IRS considered whether an exchange of standing and cut timber located on 60 acres owned by the exchanger for a fee interest in three parcels of timber land qualified as a like kind exchange.  Since the relinquished property consisted of a conveyance by “timber deed” of all standing a cut timber located on the 60 acres that would be removed within a specified period (any remaining timber reverted to the exchanger), the relinquished property consisted of personal property.  The two-year contract period amounted to a de facto restriction on the number of trees that could be removed, so the duration of interests was dissimilar.

In a properly structured transaction, standing timber can be exchanged for other qualifying real property interests.  The question of whether a property interest is personal property or real property is resolved under state law.  Differences in state law do exist, so competent legal counsel is necessary whenever fee title to the property is not being sold. Factors to consider when timber interests are exchanged include:

  • Is the timber right being conveyed limited or perpetual?
  • Are the timber rights being conveyed with a fee interest or pursuant to a lease with a term greater than 30 years including options?
  • Are rights to cut timber in the nature of a service contract as opposed to a property right?
  • Are the rights to harvest timber conveyed by deed, or bill of sale or license agreement?
  • Does the conveyance instrument contain an obligation to cut and remove timber.

Disclaimer: 1031 exchange made simple does not guarantee the performance of the QI's in our referral network and we can not be held liable for any misrepresentations or mistakes in regards to a 1031 exchange by one of the QI's that we refer to you. 1031 Exchange made simple does not provide tax advice nor can we make representations regarding the tax consequences of an exchange transaction. 1031 Exchange made simple is a 1031 QI Referral Network. 1031 made simple is not responsible (in any way) for the performance, creditability, and financial condition of any QI in our network. In this new economic environment it is imperative that all potential 1031 exchange customers do their own due diligence and research on any QI that they may use, on a 1031 exchange. Please verify and check the validity of the Bonding and Insurance of your QI. It may be wise to have your 1031 exchange accounts set up as separate, individual customer accounts. Our web site is to be used as a information based web site only. All parties doing a 1031 exchange must consult their tax advisors or attorney for this information.

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