Keep Good Records!
The importance of keeping good records on your property cannot be overemphasized. Accurate records are critical to responsible stewardship and to the future of forest land as well as to the proper reporting and documentation of income and expenses for tax purposes. An excellent record keeping and account book entitled the Forest Management Account Book (Extension Bulletin 360-A) can be purchased from your county extension office.
Property Taxes
These are paid yearly to county government. Forest landowners can receive a lower property tax assessment in one of three ways: a) through a forest management program, b) enrolling in an agricultural district, or c) donating/selling a conservation easement.
A) Forest Management Programs
To reduce property taxes, a forest landowner must first have a forest stewardship plan for a minimum of five forested acres. The plan can be developed to meet the landowner's objectives by a Maryland licensed forester--a Department of Natural Resources forester, a private consulting forester, or an industrial forester. This plan must meet the basic requirements for the Forest Stewardship program (minimum five forested acres) or the Tree Farm program (in Maryland, a minimum of ten forested acres). The Maryland Department of Assessments and Taxation offers landowners two assessment options: Forest Conservation Management Agreement (FCMA) or the Forest Management Plan (FMP). Both FCMA and FMP reduce property taxes but usually do not affect the fair market value used to assess an estate for taxes.
Forest Conservation Management Agreement (FCMA) - Any owner of five or more contiguous acres is eligible to enter a FCMA with the Maryland Department of Natural Resources. House sites, crop land, and other non-forest open spaces are not eligible, but land recently planted to forest tree seedlings or Christmas trees is eligible one year after planting. The FCMA is based on a forest management plan developed by a Maryland registered forester in consultation with the landowner. Certain forest management activities are outlined to be completed during a minimum period of fifteen years. The plan and associated activities can be adapted with agreement by the forester and it can be extended. It is a legal agreement recorded in land records, binding for fifteen years, and can be renewed. In return, the property is assessed at $100/acre regardless of where it is located in Maryland. The valuation is frozen at that level for the fifteen years of the agreement. If the plan is not followed for the full fifteen years, penalty taxes will be owed for the non-compliant year.
The FCMA involves several fees:
- A management plan development fee of $175-$225, depending on the acreage; this fee is not eligible for cost sharing if the plan is developed by a DNR forester;
- An entry fee that is equal to 0.55 percent of the assessed value, but not less than $50; and
- An inspection fee equal to 20 percent of the entry fee but not less than $100, for an required inspection by a DNR forester every five years.
- Information on FCMA is available from the local DNR forester or the county Extension office.
Forest Management Plan (FMP) differs from an FCMA in that it is not a legal agreement and does not involve an entry fee. As with the FCMA, a Maryland registered forester, in consultation with the landowner, prepares a forest management plan. The plan is submitted by the landowner to the county assessor. Most county tax assessment offices require an inspection every three years by a Maryland registered forester. Many consultant and industrial foresters do not charge an inspection fee for existing clients. Land under FMP is valued at $150/acre. This value is not frozen and could change during the three years of the agreement, but in the past these changes have not been significant.
The FMP has these fees:
- Management plan development fee. Some industrial foresters will develop plans for their clients in exchange for first refusal on the sale of any timber products. Under the currently-unfunded federal Stewardship Incentive Program (SIP), the cost of having the plan developed by a consultant forester qualified for 65 percent cost-sharing.
- Inspection fees, if inspections are required by the county tax assessment office, depend on whether the inspection is done by a DNR, consulting, or industrial forester.
The difference between the tax bills of the FCMA and FMP options can be small. However, the FMP differs from the FCMA in these respects:
- No entry fee;
- No legal attachment in the land records; and
- Shorter time period.
Some county assessment offices may be reluctant to acknowledge the FMP option, but this is a state tax assessment option that counties are bound to honor. For more information, contact the county tax assessment office, DNR forester, or a consultant or industrial forester. A list of registered consultant and industrial foresters is available from the local DNR forester or the local Extension office. Landowners need to assess their situations to determine whether FCMA or FMP is more advantageous. DNR foresters have computer software to analyze a forest landowner's information to determine which agreement would be more beneficial.
B) Agricultural District
Forest land is eligible for enrollment in an agricultural district, thereby reducing the land assessment and the property taxes. A minimum 100 acres (lesser acreage if adjacent to an existing agricultural district) and a natural resources conservation plan, developed by the Natural Resources Conservation Service in consultation with the landowner/manager, are required. Eligibility is based partly on soil types. Soils that do not meet the requirement for agriculture use may meet the requirement for forestry use and be eligible. Enrollment in an agricultural district is for renewable five or ten-year periods, depending on the county. An agricultural district is an agreement to continue agriculture/forestry operations. It provides some protection against nuisance complaints and is a prerequisite for selling a conservation easement to the Maryland Agricultural Land Preservation Foundation. Contact the county planning department.
C) Conservation Easement
Forest land that is eligible for the sale or donation of a conservation easement most likely also will qualify for a reduced assessment. Consult the University of Maryland's Center for Agricultural & Natural Resource Policy fact sheet, Estate Planning and Conservation Easements, for more information. Contact the Maryland Environmental Trust (donation of easement) or the Maryland Agricultural Land Preservation Foundation (sale of easement).
Timber Taxes
The sale of forest products can result in increases in tens of thousands of dollars in income in that year. There are a number of strategies to minimize timber taxes. The most common strategies to remember are:
Keep records of all your forest land-related activities on your property using the Forest Management Account Book (Extension Bulletin #360).
Use the services of a licensed consultant forester to act as your agent in the timber sale. The University of Maryland Extension Bulletin #367, Marketing Forest Products, provides more detail on how to properly market forest products.
Claim timber sale income as capital gains, not ordinary income which has a higher tax rate and is subject to 15.3% self-employment tax.
Have a forester calculate the basis value of the timber which can be subtracted from the income received from the sale of forest products.
Remember to subtract the expenses associated with the sale, such as the commission paid to a consultant forester, equipment, travel, meals, etc.
Locate an accountant who is familiar with the specialized are of timber taxes.
Use the National Timber Tax Website, consult the USDA Forest Service’s Forest Owner's Guide to the Federal Income Tax (Agriculture Handbook 718), or Penn State University’s Timber Taxation: A General Guide for Forestland Owners.
Estate Planning
Federal estate taxes are paid by the heirs when the owner of an estate dies. Unfortunately, planning ones estate requires accepting one's own mortality and communicating with the heirs about the future of the property.
Publications
Woodland owners may also wish to consult the National Timber Tax Website. The site contains annually-updated information that documents important changes to federal tax codes as well as webinars presented by timber tax specialists.