Timber Tax Basics for Pennsylvania Landowners

One of the most common questions we get, usually after the initial excitement of learning what a walnut is worth, is: “Wait — do I have to pay taxes on this?” The short answer is almost always yes. The longer answer is that the tax bill on a timber sale is often much smaller than people expect, and there are two specific things you can do to keep it that way. Those two things are the reason this post exists.

The two sentences you actually need

1. If you’ve owned the property for more than a year and the trees are not part of a business, the IRS almost always lets you treat the sale as a long-term capital gain rather than ordinary income — which usually cuts the federal tax rate roughly in half.
2. You can deduct your cost basis in the trees from the sale price before calculating the gain — and for most PA landowners who inherited or have owned the land for a long time, that basis can be surprisingly large.

Getting both of those right is the whole ballgame. Missing either one is the difference between paying 15% federal tax on a small gain and paying 24%–37% federal tax on the entire sale.

Capital gain vs. ordinary income: why it matters

The IRS categorizes timber income in one of two ways, depending on who you are:

• If timber is your business (you’re a logger, a forestry company, or your primary activity on the land is growing and selling timber): the income is usually ordinary business income and taxed at your normal income tax rate plus self-employment tax. That can land you in the 22%–37% federal bracket plus ~15% self-employment.
• If you’re a landowner and timber is an “investment” or “passive” activity (you own a house or a farm and sold some trees): the income is usually a capital gain. If you’ve held the property for more than a year — which applies to virtually every homeowner — it’s a long-term capital gain, taxed at 0%, 15%, or 20% federal, depending on your total income.

For almost every residential landowner in Franklin County, you want to be in the second category. The IRS rule that makes this possible is IRC Section 631(b), which lets a non-commercial landowner treat a timber sale as a capital gain as long as the buyer takes possession of the trees through a cutting contract (which is how we and every other legitimate buyer structure deals). That’s one of the reasons a written contract matters — it’s not just about trust, it’s also about how the IRS classifies the income.

Cost basis: the money you don't pay tax on

The IRS only taxes your gain, not the whole sale price. Your gain is:

Sale price — cost basis — selling expenses = taxable gain

“Cost basis” in timber is the value that the trees had when you acquired them. For a Franklin County homeowner, that usually means one of two things:

You bought the property

Your basis in the land is the purchase price. Your basis in the timber is the portion of that purchase price that was attributable to the standing trees at the time of purchase. If you bought a 5-acre property in 2010 for $280,000 and a forester estimated the timber on it was worth $18,000 back then, your timber basis is $18,000. If you sell $20,000 of timber today, your taxable gain is only $2,000, not $20,000.

The problem: almost nobody does a timber appraisal when they buy a house. Which means most landowners don’t have a documented basis. You can retroactively establish one using a qualified forester’s back-cast valuation (based on growth models and historic stumpage prices), but it requires paperwork. A good CPA with a consulting forester can often establish a meaningful basis on a 10- to 30-year-old property. This is one of the biggest tax-saving moves available to a residential timber seller.

You inherited the property

Your basis in both the land and the timber is the stepped-up fair market value at the date of the previous owner’s death. This is enormously favorable. If your parents bought the farm in 1972 for $30,000 and it was worth $600,000 (including maybe $80,000 of timber) when they passed, your basis in the timber is $80,000 — not the $5,000 of growth your parents originally paid for. If you sell $75,000 of that timber today, you probably have no taxable gain at all.

Most heirs don’t know this and end up paying unnecessary tax. If you inherited the property and there was no timber appraisal at the time of death, it is usually still possible to establish a retroactive stepped-up basis — but the further back in time it goes, the harder it gets. Earlier is better. This is the single biggest reason to call a CPA before you sign a sale contract on an inherited property, not after.

IRS Form T (Forestry) — the form your CPA will probably use

If you claim a timber capital gain and you want to deduct your basis, the IRS expects you to fill out Form T (Timber), “Forest Activities Schedule.” It’s the standard way the IRS documents basis, depletion (the portion of your basis that gets “used up” in the sale), and gain. A CPA who knows timber will file this automatically. If your CPA has never heard of Form T, find one who has.

You can read the IRS overview of timber taxation on the National Timber Tax Website — it’s a free resource run by Purdue University and it’s the single best starting point for landowners and CPAs alike.

Pennsylvania state tax

Pennsylvania makes this easier than most states in one way and harder in another.

• Easier: PA has a flat state income tax of 3.07% (as of 2026) that applies to all income categories — PA does not distinguish between ordinary income and capital gains at the state level. So whatever your final gain number is, your PA state tax on it is 3.07%, full stop.
• Harder: PA’s flat rate also means you can’t get a lower state rate by qualifying for long-term capital gains treatment. The federal benefit is still huge; the state benefit is neutral.

Municipalities in Franklin County may also levy a local earned income tax, but most interpret timber sale proceeds as non-earned (investment) income and exempt it. Check with your local EIT collector to confirm.

A rough worked example

Let’s say you live on a 3-acre property in Chambersburg that you inherited from your parents in 2016. Fair market value of the timber at that time, which a CPA helped you establish retroactively, was $22,000. You sell a few mature walnuts and white oaks through us today for a gross of $24,500. Our 10% fee is $2,450, leaving you with $22,050 net. You pay $800 to an arborist for felling — a selling expense. Here’s the tax math (approximate, not specific to your situation):

The same sale, without the stepped-up basis and without the long-term capital gain treatment — for example, treated naively as ordinary income — could cost you five figures in federal tax. The paperwork is worth doing.

Things to save, in case the IRS ever asks

1. The signed timber purchase agreement with the buyer.
2. The mill scale report showing what the logs graded out to.
3. Any checks, ACH confirmations, or 1099 forms from the buyer.
4. Receipts for arborist, trucking, and any other selling expenses.
5. Documentation of your cost basis: the property deed, the purchase appraisal (if one exists), the inheritance paperwork, and any retroactive forester valuation used to establish basis.

Keep all of this for seven years. The IRS normally can only look back three years, but for substantial understatements they can go back six, and there’s no statute of limitations on fraud. Seven years is the safe number.

How Franklin Timber helps with the paperwork

We’re not your CPA and we can’t be. But here is what we do to make the tax side easier for landowners who work with us:

• We use a written purchase contract structured as a cutting contract, which is cleanly eligible for IRC 631(b) capital gains treatment.
• We issue a 1099-S for sales over $600 (this is a recent requirement and we do it automatically).
• We provide you with a copy of the mill scale report and a detailed accounting of the sale, including our 10% fee shown as a separate line item (so it’s clearly a deductible selling expense on your return).
• If you need a forester to help establish retroactive basis on an inherited or long-held property, we can introduce you to consulting foresters in the region who specialize in this.