At many tree farms, especially if you celebrate Christmas, not only will you find the trees, you may have to cut them down, too. Or, if you are a conservationist, you may bring it home, roots and all. At other times of year, perhaps you'll visit a tree farm and size one up for your yard. Tree farming is arduous work but there are several tax advantages for being in the tree farming business.
Capital Gains Tax
The trees that a farmer sells are taxed at capital gains rates if they are held for a minimum of 12 months, not at the higher ordinary income rates. What's more, during 2008 through 2010, a law was in effect that excludes the tree farmer's first $32,500--Double that amount if he is married and files jointly--in tree revenue. Exclusions after 2010, the year of this writing, are not yet determined. If the farmer renders services such as cutting and hauling the trees to increase value to his customers, revenue from those price increases are subject to ordinary income tax rates.
Tree Planting Costs
A real benefit to tree farmers is that they can deduct the first $10,000 in costs per year for planting trees if the they are married and file jointly. Furthermore, a farmer can deduct the remaining expenses over eight years, thus saving even more money on his income tax. These provisions in the tax code were enacted to encourage planting and regeneration.
If a tree farmer gives a permanent conservation easement to a charity approved by the Internal Revenue Service, he can deduct an amount up to half of his adjusted gross income. What's more, if the amount of the deduction exceeds that limitation, he can continue deducting its value for up to 15 years. However, if he derives the majority of his income from his tree business, then he can deduct an amount up to his entire adjusted gross income.
Under normal conditions, someone who is selling a piece of property and buying another would pay tax on the one that's sold. Instead, you do not have to pay tax resulting from the sale if you first identify the replacement farm within 45 days of the sale of the original one, and you close on its replacement within 180 days of such sale.