TAX IMPLICATIONS OF RECREATIONAL PROPERTIES
Paul D. Spillers, Theus, Grisham, Davis & Leigh, Monroe, Louisiana
Our tax law favors active "trade or businesses" and discourages "hobbies". Recreational land may fall within either category, depending upon whether the taxpayer has a requisite profit motive. Expenses associated with trades or businesses are fully deductible for income tax purposes in the year incurred; expenses associated with hobbies are non-deductible. Deductible expenses generate immediate tax savings. A $10,000 current deduction generates a $3,000 current tax savings if a taxpayer is in the 30% tax bracket.
A taxpayer has 1,000 acres of forestland currently managed solely for timber production. Assume the taxpayer, in addition to timber production, leased his land to RRR, a social club organized to pursue "rest, relaxation, and recreation" and whose primary objective is providing its members with an opportunity to enjoy nature. Its members participate in observing and photographing all forms of wildlife. RRR is particularly interested in the 1,000 acre tract because of its excellent wildlife habitat consisting of miscellaneous mast producing hardwood and pecan trees and other established vegetation such as honeysuckle, crab apple, and pear trees. The tract is also traversed with foot trails providing access throughout the property.
If the taxpayer has the requisite profit motive the recreational lease can produce substantial tax benefits. One of the most significant potential tax advantages is that the "basis" of the trees and other wildlife habitat assets may be depreciated over the useful lives of the assets. Significant depreciation deductions may be available. Generally, trees grown only for timber purposes are not depreciable but, instead, are depletable when harvested. IRC, Section 611. Depletion is not as favorable as depreciation. However, trees associated with an active trade or business are depreciable. See Treas. Dec. 8897; Rev. Rul. 80-25; Rev. Rul. 67-21; Woods vs. Commissioner, TC in Memo, 1960-72; LaCroix vs. Commissioner, 61 TC 471. A taxpayer who attempts to cultivate a herd of trophy deer for the purpose of attracting premium prices from deer hunters is in an active "trade or business". PLR 9615001.
Assume the taxpayer's 1,000 acres has 200 acres of mast producing hardwoods, 25 acres of honeysuckle, and 5 acres of miscellaneous crabapple, pear, and other fruit trees. The primary purpose of these trees is to provide a habitat for wildlife. The landowner, with the assistance of a wildlife expert, can estimate the useful life of these assets and then depreciate the basis of each asset class over the asset's useful life. This approach should yield a substantial depreciation deduction that otherwise would be unavailable to the taxpayer. A $10,000 per year depreciation deduction associated with these assets will yield a $3,000 per year tax savings if the taxpayer is in the 30% tax bracket.
A taxpayer interested in pursuing these ideas should consult with both a tax advisor and a wildlife expert.