Depending on whether state laws recognize timber rights as real property along with the duration of the rights directly impacts their eligibility for a tax deferred 1031 exchange. Factors impacting demand for timber include the U.S. housing market, paper products and market demand from Europe and China. Forest land owners selling timber rights and timberland utilize the Internal Revenue Code Section 1031 to defer capital gains when selling and reinvesting into either second growth timberland tracts, oil and gas royalties or commercial property.
In many states timber rights can be separated and sold independently of the timberland. Given the timber right is not a carve out or for a short period of time, the right can be exchanged for real property.
Changing Ownership Trend
A current trend appears to be forest product companies divesting themselves of timberland while institutional investors and family owners are increasing their timberland investment portfolios.
- In February, 2011, Hancock Timber Resource Group purchased an 82,000 acre block in SouthWest Washington from Weyerhaeuser for $200 million.
- In October, 2010, media billionaire John Malone bought the 53,524 acre “Frontier Forest” near Jackman, Maine for $14 million from Great Eastern Timber Company, LLC. His Maine land holdings are nearly 70,000 acres.
The U.S. Department of Agriculture estimated that in 2009 the nation had 500 million acres of timberland. The ownership breakdown was as follows: government, 27%; wood and paper companies, 17%; institutional investors like college endowments, 4%; individuals, 54%, up from 45% two decades ago.
According to the U.S. Forest Service’s National Woodland Owner Survey, an estimated 11 million private forest owners control 56% of the forest land in the United States. Family forest owners account for 92% of the private forest owners and 62% of private forest land (35% of all forest land) in the United States.
Over the years, there has been a significant increase in the number of family forest ownerships. These wealthy individuals and families buy timberland for using it as aesthetic and recreational amenities, family legacy, timber production and as an investment.
Timberland investors engage in the use of 1031 exchanges to upgrade their portfolios of timberland holdings (swapping 5% returns for 8% returns). Timberland sales and purchases must be carefully managed to optimize three return components: biological growth, timber product prices and land value. Similar to REITs or Real Estate Investment Trusts, Timber REITs such as publicly traded Plum Creek, Potlatch, Rayonier, timberland is disposed and acquired similar to commercial property based upon investment criteria.