Selling Timber or Selling Land May Still Lead To Loss

Q: In 2006, I purchased a large tract of timberland in central Georgia – about 130 acres in total. The purchase was strictly for investment purposes. My plan was to sell it over two years and make a decent profit.

I did the research and given market conditions and demographics at the time, my goal was not unreasonable goal.

I sold 20 acres within the first year and made good money. But I still have 110 acres to sell and, in this economy, it ain’t movin’. Yes, I can sustain the carrying costs for another year or two if I had to, without dipping into savings or ruining myself financially.

But I’ve done the math. If I sold the land tomorrow, I’d barely break even. Each month that goes by, I’m losing more money – money that I’ll never see as return on investment.

I’ve considered selling some of the timber, but timber prices are down right now so that wouldn’t make much of a dent, plus it would devalue the property.

So do I drop my price dramatically, stop the bleeding, sell it to some bottom feeder and get out? (I would likely have to eat a large sum but at least I’d be done with it…) Or do I hang on indefinitely, continue making payments each month, and wait for things to turn around? I lose money either way. I just don’t know which way to go.

I would greatly appreciate any advice you have.

A: The question of whether you’ll lose more money by hanging on or by dumping the land now is one only you can answer. You’re there and I’m not. You’re the one seeing what’s happening. And, only you know what your true costs are.

My feeling is that if you don’t have a prayer of making money in the next 3 to 4 years, you should get rid of the land. What happens if you have it for 5 to 10 years before selling it? A lot can happen in that time.

It sounds as though you made some money on some of the acreage. If you can get your base cost out of the rest, you’ll be a little ahead – which in the worst real estate recession in 70 years is saying something.

I know a lot of developers who would be delighted to trade places with you.

One final thought: Is your land tradable for another asset? You may wish to explore this and consider a 1031 exchange. Perhaps you’ll have better luck with a different type of asset.

If you have taken any depreciation (but not on the land), you might have to pay a tax when you sell the land with the timber. A 1031 exchange is a mechanism in which you sell this land and buy some other land and defer the payment of any federal income taxes on that sale.

If you have not taken depreciation, and will only have a loss, then a 1031 tax deferred exchange may not be right for you.