Understanding the Capital Gain Method for Christmas Tree Growers
If you’re a Christmas tree grower, there’s a unique tax-saving strategy that could benefit you during tax season: the “capital gain method.” While it’s not an official term in the Internal Revenue Code (IRC), this approach leverages IRC § 631 to help Christmas tree growers save significantly on federal income taxes. Let’s dive into what this method entails and how it can be applied to maximize your tax savings.
What is the Capital Gain Method?
The capital gain method, as I call it, refers to a provision in IRC § 631 that treats qualifying Christmas trees as “timber.” By classifying your Christmas trees as timber, you can take advantage of favorable long-term capital gains tax rates on the sale of your cut trees instead of the higher ordinary income tax rates.
Qualifying for Timber Classification
For your Christmas trees to qualify as timber under Section 631, they must meet a few specific requirements. Generally, if you’re growing and selling cut trees that you’ve cultivated yourself, you’ll likely qualify. The four main criteria are:
- The tree must be an evergreen tree;
- It must be over six years old;
- It must be severed from its roots; and
- It must be sold for ornamental purposes.
Since most mature trees sold by Christmas tree growers meet these criteria, they are eligible to be classified as timber under Section 631.
Tax Savings: Capital Gains vs. Ordinary Income
Using the capital gain method offers a substantial tax-saving opportunity by shifting your income from ordinary income to long-term capital gains. Here’s a quick breakdown of the potential savings:
- Ordinary Income Tax Rates: Without Section 631, Christmas tree sales would be taxed as ordinary business income, subject to rates from 10% to 37%, plus a self-employment tax of 15.3%.
- Capital Gains Tax Rates: With the capital gain method, long-term capital gains are taxed at much lower rates—ranging from 0% to 20%, with most taxpayers falling into the 15% bracket.
For many growers, this means a significant reduction in tax liability.
Properly Preparing Your Tax Return
While the capital gain method offers a great opportunity to save on taxes, it’s essential to prepare your tax return correctly to qualify. This process involves allocating income accurately on your return and completing additional forms specific to timber classification. Missteps in reporting can lead to a loss of this beneficial tax treatment, so attention to detail is key.
Where to Learn More
If you’re interested in learning more about the capital gain method, Andrew offers several resources:
- Free Video: For an introduction to this strategy, start with my free one-hour video course, The Number One Way Christmas Tree Growers Save Taxes. It provides a comprehensive overview of the capital gain method and is based on a common presentation I give at Christmas tree association meetings.
- Masterclass: For an in-depth dive, my Capital Gain Method Masterclass covers the law, sample tax forms, and step-by-step guidance on applying this strategy to your specific situation.
With these resources, you’ll have the tools to implement the capital gain method and potentially enjoy substantial tax savings. If you have questions or need further guidance, feel free to reach out to me for support!
