1031 Exchanges of Timberland and Timber
The sale or disposition of timberland and unsevered timber (standing timber) can qualify for tax-deferred treatment under Internal Revenue Code (IRC) Section 1031, provided that like-kind replacement property is acquired as part of a properly structured exchange.
Timberland and Unsevered Timber as Real Property
For 1031 Exchange purposes, timberland and unsevered timber (also known as standing timber or stumpage) are generally considered real property.
However, once timber is cut and removed, it becomes personal property, and the right to cut and remove timber under a timber deed or cutting contract is also typically classified as a contractual right (personal property) rather than real property.
Role of State Law in Property Classification
It is important to note that state law determines whether timber-related rights are real or personal property. Because classification may vary between jurisdictions, consulting legal counsel is necessary before completing a timber-related 1031 Exchange.
Qualified Use Requirement and Intent to Hold
As with all 1031 Exchanges, both the relinquished property and the replacement property must meet the qualified use test. This means the property must be:
Held for investment purposes, or
Used in a trade or business.
Timber or timberland held primarily for resale (e.g., as inventory) does not qualify. However, unharvested timber exchanged together with the underlying land can qualify, as it may be considered part of an unharvested crop attached to the real property.
Examples of Qualifying Exchanges
IRS rulings provide guidance on what types of timber-related exchanges may qualify. Examples include:
Timberland with old growth timber for timberland with second growth timber (Rev. Rul. 72-515).
Timberland for bare land (Rev. Rul. 78-163).
Timberland for urban real estate (e.g., a commercial building).
Undeveloped ranch land for timberland.
Tree farm in one state for timberland in another state.
Timberland with reserved cutting rights for state-owned timberland of lesser value (Rev. Rul. 76-253).
Timber cutting rights on one tract for timber cutting rights on another, when state law classifies such rights as real property.
Timberland held by a testamentary trust for timberland held by an inter vivos trust.
Examples of Non-Qualifying Exchanges
Certain transactions involving timber do not meet like-kind exchange requirements, including:
Timber held primarily for sale (inventory) exchanged for timberland.
The right to cut timber on the taxpayer’s own land exchanged for other timberland.
A sale of timberland for cash followed by a later purchase of replacement timberland (this is a taxable sale and repurchase, not a valid exchange).
