If I cut timber before selling the land, what tax do I pay on the timber?

Selling the trees standing to a logger gives section 1231 treatment

Most owners do not cut their own timber. They sell stumpage to a logger, either for a lump sum or per unit as the wood comes off. Section 631(b) covers both: when an owner who has held the timber for more than one year disposes of it by outright sale or under a contract in which the owner keeps an economic interest, the amount realized less the adjusted depletion basis is treated as gain on the sale of the timber.

Section 1231(b)(2) then brings that timber into section 1231. Net section 1231 gain for the year is treated as long-term capital gain, so for most landowners the harvest is taxed at 0%, 15% or 20% rather than ordinary rates. IRS Publication 544 says the gain goes on Form 4797 with your other section 1231 gains and losses.

Cutting and selling the logs yourself is ordinary income unless you elect section 631(a)

If you fell the trees and sell logs, firewood or pulpwood, the general rule is ordinary income. Publication 544 says farmers who cut timber on their land and sell it as logs report the proceeds and the cutting and hauling costs on Schedule F.

Section 631(a) lets an owner who has held the timber for more than one year treat the cutting itself as a sale. The gain is the timber's fair market value on the first day of the tax year in which it is cut less its adjusted depletion basis, and that value becomes your cost in the logs, so only the margin above it on the later log sale is ordinary income.

The election is made on the return for the cutting year and, under the Instructions for Form T, cannot be made on an amended return. The statute applies it to all timber you own or have a contract right to cut, for that year and later years, so it is a business decision rather than a one-harvest tactic.

Cut timber leaves the real property, so the harvest money cannot join the land exchange

Reg. section 1.1031(a)-3(a)(3) treats unsevered timber as real property and then says natural products such as timber "cease to be real property when they are severed, extracted, or removed from the land." Standing trees sold with the land are part of the land. Logs decked at the landing, or stumpage sold to a logger before the land sale, are not.

That gives you two transactions on two timelines. The harvest is taxed in the year of the cut or the payment, and the land sale, now of cut-over ground, is the only thing a qualified intermediary can take into an exchange. A stand of merchantable timber left in place, by contrast, adds its full value to the relinquished property and its gain to the deferred amount.

Whether a timber deed or cutting right sold separately can itself be like-kind real property depends on state law and the term of the right; the case law is set out on our timberland page, and it is not a position to rely on without counsel.

Hypothetical: harvest first, or sell the tract with the trees standing

A couple filing jointly owns 300 acres with a $400,000 basis: $250,000 in the land account and $150,000 in the timber account. A forester values the merchantable timber at $600,000 and the bare land at $900,000. Both are held for investment, all figures are round and hypothetical, and run your own numbers with your CPA.

Harvest first: a lump-sum stumpage sale of $600,000 produces $450,000 of section 631(b) gain this year. Their 2026 15% bracket ends at $613,700 of taxable income under Rev. Proc. 2025-32, so part of it may reach 20%, and the 3.8% net investment income tax in section 1411 applies above $250,000 of modified adjusted gross income. They then exchange the $900,000 land and defer its $650,000 gain.

Sell together: one $1,500,000 sale of land and standing timber through an intermediary defers the whole $1,100,000 gain if they reinvest the full price. The trade-off is that the buyer pays for the timber inside the land price, and the buyer pool for timbered land may differ from the logger market.

Settle the timber accounting before anyone signs a cutting contract

The order of the steps decides which gain is taxed now and which is deferred.

• Have a forester cruise the stand so the timber value, and the depletion basis under Reg. section 1.611-3, can be separated from the land.
• Decide whether you want cash now from the harvest or a larger exchange later; the two do not combine.
• If you exchange the land, engage the intermediary and assign the land contract before closing, as for any 1031 exchange.
• Keep Form T records even when an occasional sale exempts you from filing it.
• Check that a harvest does not conflict with a conservation easement or lease on the tract.

Where a DST changes the answer

Timber pays when it is cut, often years apart. Owners who sell the tract with its trees standing sometimes exchange into rental property so the income arrives as rent instead of harvests. Under Rev. Rul. 2004-86 a beneficial interest in a properly structured Delaware statutory trust is treated as an undivided interest in its real estate, so land proceeds can go into a traditional DST held alongside or instead of direct property. DSTs are illiquid, carry sponsor and leverage risk, and pay no guaranteed distributions.