EXTENSION FACT SHEET The Taxpayer Relief Act of 1997: What is in it for the private forest landowner?

The August 5, 1997 signing of the Federal Taxpayer Relief Act included a number of provisions, two of which are significant for the private forest landowner. The two provisions are: 1) a cut in the capital gains tax for noncorporate taxpayers individuals, and 2) estate tax relief. Discussed below are the key elements of the two provisions.

Capital Gains

A capital gain is the difference between an asset's purchase price (could also be inherited or received as gift) and selling price (less sale expenses). Private forest landowners who receive income from their timber sales can treat it as a long-term capital gain if they have held it for the required holding period, and meet certain other requirements.

For any asset (e.g., timber) a noncorporate landowner sells after May 6, 1997, the top capital gains tax rate is reduced from 28% to 20%. For individuals in the 15% tax bracket (about $41,200 for joint filers) the capital gains tax is reduced from 15% to 10%.

Under the new law, assets sold after July 28, 1997, must be held at least 18 months to qualify. A "long-term capital gain" was previously defined as a gain on the sale of an asset held for more than 12 months. Only assets sold after May but before July 29 qualify for the new 20% rate if they were held for more than one year.

For example, if you are in the 28% bracket, and sell timber that you have held for longer than 18 months with a capital gain of $20,000, your tax on that gain will decline from $5,600 to $4,000.

Capital gains taxes are going to be even lower for assets purchased after December 31, 2000, and held for more than five years. This new rate will be 18% for those currently in the 28% bracket.

Estate taxes

Beginning in 1998, the unified estate and gift tax credit will increase annually, until the maximum value of the estates exempt from the tax reaches $1 million in 2006. Table 1. shows the increase by year. The current limit is $600,000.

Table 1.

Year	Amount
1997	$600,000
1998	$625,000
1999	$650,000
2000-01	$675,000
2002-03	$700,000
2004	$850,000
2005	$950,000
2006	$1,000,000

Another important piece of the estate tax provision is special treatment for "qualified family-owned businesses" (business interests that comprise more than 50% of the decedent's adjusted gross estate). The provision excludes the first $1.3 million of value in qualified family-owned business interests from a decedent's taxable estate. The unified credit exemption mentioned above is part of the $1.3 million. The exclusion must not exceed $1.3 million and is therefore essentially equal to the $1.3 million less the unified credit effective for the year of death. In 1998 this amount is $675,000: $1.3 million minus the $625,000 unified credit. The $1.3 million is not indexed for inflation. Because the Act limits the combined value of this exclusion with theunified and gift estate credit to $1.3 million, the amount if this exclusion that will be available each year will decrease as the value of the unified credit increases.

For the family business exclusion the death must occur after December 31, 1997 and the decedent (or members of the family) must have owned and materially participated in the business for at least 5 of the 8 years immediately preceding death. There are some other technical requirements such as the tax being "recaptured" if the heirs sell the business within 10 years after the date of death.

What this means?

Opinions abound about the impact of the Taxpayers Relief Act of 1997. As you can see many of the provisions are phased-in and will not really have an impact on the forest landowner until the next century. The 18% capital gains rate only kicks in after 2006. The full $1 million estate tax exemption does not apply until 2007. Given these delays in implementation, the tax cuts will not have a major effect on forest landowner activities over the next few years. The largest benefit to landowners will probably come from reductions in the tax on capital gains from timber sales. This may result in a short-term increase in timber supply, which in turn can affect stumpage prices. It is important to note that there are no fundamental changes in estate planning techniques. Furthermore, this information is by no means comprehensive. It is intended to provide a brief overview of the two provisions that affect forest landowners. The landowner should still discuss these new provisions with a tax accountant.

For more information contact: Cooperative Extension Service, University of Florida, Michael Jacobson, Extension Specialist, Box 110410, Gainesville, FL 32611. Phone: 352-846-0883. Fax: 352-846-1277