By Matthew Litz, Senior Manager, BerryDunn’s Tax Consulting and Compliance Group,
Back in 2005, the Maine Legislature enacted a bill that provides an incentive to taxpayers with long-term holdings of timberlands in Maine. The catch – the tax benefit did not kick in until January 1, 2015, at the earliest. As a result, this piece of legislation was largely forgotten until now.
“That law was created as part of the liquidation harvesting law passed under the Baldacci administration,” says Peter Triandafillou, vice president of woodlands, Huber Resources. “All of it fell under the idea of encouraging long-term land holdings. The anti-liquidation part was foolish, but this law makes sense.”For tax years beginning on or after January 1, 2015, the law exempts a portion of the gain from the sale of certain timberlands from Maine income tax. Depending on the length of time these timberlands are held, up to 100% of the gain on the sale may be exempt.
So how do the rules work?
The rules provide for an income subtraction modification to Maine taxable income equal to 1/15th (or 6 2/3 percent) of the gain realized on the sale of sustainably managed, eligible timberlands held by a taxpayer for at least ten years beginning on or after January 1, 2005. The percentage used in the subtraction modification is increased by 1/15th for each year beyond the tenth year the property is held, and may ultimately equal up to 100% of the gain realized on the sale of eligible timberlands.
It’s a little complex, so let’s look at an illustrative example:
A landowner purchased eligible timberlands in December 2004. The percentage amount used to compute the subtraction modification, depending on the year of the sale, is shown below:
In this situation, if the landowner sold the timberlands in 2015 and recognized a gain, the seller would receive a Maine income subtraction modification equal to 6.67 percent of the gain that year. For a 2016 sale, the landowner would receive a subtraction modification of 13.33 percent. The percentage increases every year the taxpayer holds the timberlands until it reaches 100 percent. In our example, the subtraction modification would equal 100% of the gain recognized if the landowner sold the timberlands in 2029.
The subtraction modification may not reduce Maine taxable income to less than zero. However, to the extent the modification results in Maine taxable income that is less than zero for the taxable year, the excess modification amount may be carried forward and applied as a subtraction modification for up to ten years.
What are sustainably managed, eligible timberlands?
For purposes of these rules, “eligible timberlands” means land of at least 10 acres located in Maine and used primarily for growing trees for commercial harvesting. For the timberlands to be “sustainable managed” under the rules:
- There must be a forest management and harvest plan, as specifically defined in the rules, that has been prepared for the eligible timberlands and has been in effect for the entire time period used to compute the amount of the subtraction modification; and
- The taxpayer must receive a written statement from a licensed forester certifying that, as of the time of the sale, the eligible timberlands have been managed in accordance with the plan during that period.
These rules may provide a significant benefit to anyone considering divesting Maine timberland holdings. Through careful planning, you may be able to minimize your Maine tax liability by identifying timberlands for sale with a holding period that fits within these rules.