For investors with taxable portfolios, timberland offers certain advantages related to the unique attributes of the asset. Current federal tax laws allow income from timber harvesting to be treated as capital gains. Federal law also gives timberland owners a tax deduction, known as depletion, which is the annual cost assigned to timber harvested. This is similar to the annual depreciation allowance for tangible assets such as plant and equipment.
In the Northwest, at the state level, property tax codes have been modified to tax timberland on bare land value only and not on the value of standing timber, deferring tax on timber value until harvesting or stumpage sales generate cash income. States are paid severance or harvest taxes only when the timber is actually harvested.
For tax-exempt investors, income generated from timberland can be structured to prevent Unrelated Business Taxable Income ("UBTI").