Managing your forestland can be an excellent long-term investment. Over the years, income from managed forest stands can be substantial, depending on initial investment, markets, and various factors affecting productivity. Even managed pre-salable timber stands have increased the property value of forestland significantly compared to bare or unmanaged cutover woodland. The range of returns is wide because of variations in soil productivity, stand condition, tree species, markets (both availability and price fluctuations), intensity of management, and availability of financial incentives from state and federal agencies.

Federal and state governments offer financial incentive programs for woodlot owners. Several of these programs provide cost sharing payments to reimburse landowners for various timber management activities. Other programs provide tax incentives, tax credits, and deductions for reforestation expenses.

The North Carolina Forest Development Program (FDP) is a cost share program for reforestation, afforestation, and timber stand improvement administered by the North Carolina Forest Service (NCFS). Under the FDP, a landowner is partially reimbursed for the costs of site preparation, seedling purchases, tree planting, removal of vegetation competing with desirable seedlings, and many other practices needed to establish and improve timber stands. Landowners must have a forest management plan approved by NCFS to qualify for this assistance. The FDP currently reimburses the landowner for as much as 40 percent of the actual cost per acre or 40 percent of the prevailing rate for most of the site preparation and management practices in the region, whichever is less. The cost share rate increases to 60 percent for the planting of longleaf pine, hardwoods, or wetland species. Any private individual, group, association, trust, limited liability corporation (LLC), or corporation may qualify with as little as 1 acre and up to 100 acres. Landowners may sign up by contacting a forest ranger at the nearest NCFS county office. To learn more about the FDP or other cost share programs administered by NCFS, visit the NCFS website.

The North Carolina Agriculture Cost Share Program (ACSP) is intended to address nonpoint source pollution by reducing runoff of sediment, nutrients, animal wastes, and pesticides into the state’s surface waters. The program offers cost share reimbursements for the installation of best management practices (BMPs), such as the establishment of covers and conversion of fields. Participating landowners are reimbursed for as much as 75 percent of the average cost of the forest management practices used, including the use of existing material and labor. To be eligible for this program, landowners must have had existing agricultural operations for more than three years. The local North Carolina Soil and Water Conservation Districts administer the ACSP. Contact your district office, the NCFS, or your local North Carolina Cooperative Extension center for information on the availability of funds in your county.

The Conservation Reserve Program (CRP), administered by the U.S. Department of Agriculture (USDA) Farm Service Agency (FSA), protects millions of acres of highly erodible, marginal cropland to safeguard the nation’s natural resources. Landowners who enroll during the CRP “general sign-up” agree to retire cropland to produce permanent wildlife habitat or to grow trees, permanent introduced grasses and legumes, permanent native grasses and legumes, or combinations of permanent covers. Landowners who participate in the CRP “continuous sign-up” may receive payments for conservation on working lands, such as forests. Enrollment practices vary but may include establishment of longleaf pine, installation of forested riparian buffers, wetland restoration, and planting of bottomland hardwoods.

The FSA will reimburse participating landowners for as much as 50 percent of the cost of establishing permanent covers and will also pay an annual rental fee over a 10- to 15-year contract period. Retired acreage may not be grazed, harvested, or used in any commercial manner other than for hunting leases for the duration of the contract. Participants must comply with a conservation plan detailing their management activities and adhere to the contract's terms. Landowners must sign up for the conservation practices of their choosing during enrollment periods. For sign-up information, contact your local FSA office.

The Environmental Quality Incentive Program (EQIP), administered by the USDA Natural Resources Conservation Service (NRCS), offers financial and technical assistance for farmers and forest landowners for installing conservation practices. EQIP contracts may fund forest management practices such as forest stand improvement, fire break installation, prescribed burning, restoration and management of declining forest habitats, and tree establishment. EQIP provides a flat payment for practice installation based on 75 percent of the average costs of conservation practices (or more for historically underserved groups). EQIP activities must be carried out according to a comprehensive management plan approved by an NRCS agent in your conservation district. The NRCS evaluates applications and gives high priorities to applicants who use cost-effective practices that address national conservation priorities and optimize environmental benefits. Details about EQIP enrollment and program eligibility are available from your local NRCS service center.

Reforestation Tax Deduction and Amortization. Landowners may claim up to $10,000 annually in federal income tax deductions (married filing jointly) for qualifying reforestation expenses per qualified property in the year incurred. The cost of site preparation, seedlings or seeds, planting, tools, and depreciation on equipment may be included. Cost share funds may also be deducted if they are reported as landowner’s income. In addition, landowners can deduct (amortize) all incurred reforestation expenses that exceed the $10,000 deduction limit in any one year, and they can be deducted from gross income that comes from other sources over an 84-month (7-year) period.

Excluding Cost Sharing Payments from Income. Federal and North Carolina tax laws allow a landowner to exclude certain cost share payments partially or totally from taxable income. Check with a tax advisor to see which tax laws and programs are applicable to your situation. In general, most people will gain maximum tax advantage by including the payments as income and reporting any unreimbursed expenses that qualify for the investment credit and amortization deductions discussed in the previous section.

Annual Deductions. Whether landowners are able to deduct part or all the management expenses incurred each year depends on how their forestland ownership is classified. Forest property generally falls into three broad categories:

1. Treated as a trade or business. Material participants can fully deduct annual operating expenses regardless of whether income is received in that year. Landowners who do not materially participate in a trade or business may be limited by the Internal Revenue Service (IRS) Passive Activity Loss rules and can generally deduct expenses against passive income. Material participation requires active, regular, continuous, and substantial involvement. Accurate recordkeeping and consultation with a tax expert are recommended because documentation may be needed in case of auditing and verification from the IRS. In addition, most unclaimed annual management expenses may not be capitalized and recovered in future years when the timber is sold.

2. Treated as an investment. Annual operating and management expenses for individuals are generally not deductible from 2018 through 2025 due to the suspension of miscellaneous itemized deductions by the Tax Cuts and Jobs Act (TCJA) of 2017, but landowners may be able to deduct them starting in 2026 if Congress does not extend TCJA. These expenses must typically be capitalized in a timber or land account and recovered when the timber is sold. State and local property taxes may still be deductible for investment properties if the taxpayer itemizes, though many filers find the increased standard deduction more beneficial.

3. Treated as a personal use or hobby. Under current law, expenses related to forestland held for personal use or as a hobby are not deductible.

Long-Term Capital Gains. Income from the sale of timber owned for more than 12 months should qualify as long-term capital gains for federal tax purposes. An individual may wish to report timber income as long-term capital gains for the following reasons:

• Capital gains may be used to offset capital losses. A landowner with large capital losses may use capital gains to offset those losses in that tax year.

• Self-employed landowners must pay self-employment taxes. Capital gains are exempt from self-employment taxes.

• Capital gains from involuntary cutting, if reinvested in timber management within a certain time, are not recognized as taxable income and taxes are deferred.

• The long-term capital gains tax rate is either 0%, 15%, or 20% and is based on the taxpayer's total taxable income and filing status.

• North Carolina income tax law does not recognize long-term capital gains income; therefore, all income is ordinary.

For more information on federal tax credits and deductions for timberland, visit the National Timber Tax Website.

Property Tax. The North Carolina Forestry Present-Use Valuation (PUV) is a voluntary tax deferment program through which qualifying owners of North Carolina forestland can receive, upon approval of their application, property tax relief for managed timberland. Land that qualifies for the PUV program is assessed at its present-use value rather than its market value. Typically, the PUV is substantially lower than its market value. To be eligible, the land must be:

• individually owned, including ownership by certain types of businesses;

• in compliance with a written, sound forest management plan for the production and sale of forest products;

• within a parcel of land in actual timber production composed of at least 20 acres not included in a farm unit; and

• occupied by the owner or owned by the present owner for four years preceding January 1 of the year in which application for special assessment is made. Note: If the land is currently under PUV in which the deferred taxes remain a lien on the land, the new owner becomes liable for the deferred taxes, and the deferred taxes become payable if the land fails to meet any other condition or requirement for classification.

The county tax supervisor accepts applications for PUV during the regular listing period. The amount of tax relief varies widely by county. For information, contact your county assessor or consult the NC State Extension publication North Carolina’s Forestry Present-Use Valuation (PUV) Property Tax Program: Woodland Owner Notes.

For additional information, contact your local Cooperative Extension center, a qualified tax expert, the IRS, a consulting forester, or a representative of the NCFS. For information about other conservation programs, see the NC State Extension publication Voluntary Conservation Options for Land Protection in North Carolina: Woodland Owner Notes.