The change of ownership of a forest property can be implemented as a transaction. By nature, the transactions can be fair value transactions or gift transactions. Many transactions at fair value are made in cases where the transferor and the transferee of the property are not close relatives. Gift transactions are usually made between relatives.
Forest trade is also a good option among relatives
Trade as a method of property transfer is also well suited to close relatives in situations where the transferors need money from the forest property (for example, to purchase an apartment) or in situations where the aim is to obtain a forest deduction basis for new owners. If the forest property is rich in timber and has good felling opportunities in the next few years, the new owner can take advantage of the forest deduction in their own taxation by selling timber. Similarly, forest trade is often a suitable method of changing ownership in situations where family forests are not distributed among all children but are transferred to only one child.
Forest trade and taxation
A transaction at fair value is a transaction in which the purchase price is more than 75% of the fair value of the forest property. No gift tax is charged on transactions at fair value.
If the transaction is a gift by nature, the gift part is taxed in accordance with the gift tax provisions. For example, if the trade is worth 70% of the fair value, there is a taxable gift of 30% of the fair value. In case of transfer, the buyer of the property will pay a transfer tax amounting to 4% of the purchase price or the value of another type of compensation. The transfer tax return and payment must be made no later than 6 months after signing the contract of sale. The most flexible way to make the transfer tax return and payment is the MyTax service.
When the transfer of the forest is made as a transaction, the buyer of the property receives a forest deduction, which later reduces the taxation of the forest owner's sale of wood.
Capital gains tax return
After the forest property transaction, the seller of the property has to file a capital gains tax return with the tax authorities (tax form 9). The calculation of the capital gains is made according to the following principles:
The actual acquisition cost (depending on the seller's own purchase price, inheritance tax value or gift tax value) is deducted from the sale price of the forest property.
In this case, all expenses related to the acquisition and sale of the property, such as the transfer tax, lawsuit expenses, contract of purchase, possible parcelling expenses, real estate agent's fee, etc., can also be deducted in the capital gains calculation.
Acquisition cost assumption
Another option is to deduct from the sale price of the forest property the so-called acquisition cost assumption. In this case, however, the costs of acquiring and selling the property can not be deducted separately. The taxpayer can choose a more favourable option. If the seller has owned the forest property for less than 10 years, the assumed acquisition cost of 20% of the sale price can be deducted. If, on the other hand, the seller has owned the forest property for more than 10 years, the assumed acquisition cost of 40% of the sale price can be deducted.
For sales to municipalities, associations of municipalities or the state, an acquisition cost assumption of 80% can be used as an alternative to the actual acquisition cost, regardless of the ownership period. The acquisition cost assumption of 80 % can not be used when selling a forest to Metsähallitus as a commercial forest.
If the forest property to be sold has been entitled to a forest deduction and the seller of the forest property has used the forest deduction, the forest deduction is added to the capital gains or deducted from the capital loss. However, the increase may not exceed 60% of the acquisition cost of the forest property to be sold.
If the recipient of the gift sells the forest property received as a gift before more than one year has elapsed since the transfer, the acquisition cost of the gift recipient is considered to be the acquisition cost of the donor (the previous owner).
If capital gains arise, the capital gains tax must be paid.
The sale of a forest parcel as a nature reserve to the state (ELY Centre) is completely exempt from the capital gains tax. In these situations, forest deduction is not recognized as income.
The sale of a forest property can also result in a capital loss, especially in a situation where a forest property received as an inheritance or as a gift is largely felled and the property is sold fairly soon after the felling. The capital loss incurred since the beginning of 2016 has been deductible in the taxation of the same capital loss year and the following five years from all capital gains.
Close relatives’ transactions and capital gains tax
The sale of a forest property is fully exempt from capital gains tax if all of the following conditions are met:
This is the sale of the seller's forest or agricultural real estate (sale of a forest or a field). This form of real estate includes forest properties, tax consignment shares and joint forest shares owned exclusively or jointly owned by the spouses. Death estate shares are movable property and their sale is always subject to capital gains tax.
The buyer of a forest property, alone or together with his or her spouse, is the seller's child or his or her direct heir or the seller's sister, brother, stepsister or stepbrother.
The property has been owned for more than 10 years by the seller of the forest property or by the seller and a person from whom the seller has received the forest free of charge, that is as a gift, inheritance or by matrimonial law.
The seller has been practicing forestry on the traded forest property for at least one full tax year.
If the buyer further transfers (= sells) the property before 5 years have elapsed from the capital gains tax-free transaction involving a close relative, then the capital gains tax on the untaxed first transaction is levied on the latter seller.
Particular care must be taken with the exemption from the capital gains tax when making ownership arrangements in death estates.
Forest deduction in changes of ownership
The right to forest deduction is granted when the forest property has been acquired on or after 1 January 1993 by trade or exchange.
The forest deduction base is 60% of the forest acquisition cost. In addition to the purchase price, the acquisition cost includes transfer tax, legal fees, contract costs, trade confirmation fee, property assessment costs, possible parcelling expenses and all other trade-related costs paid by the buyer (e.g. trade-related travel costs). It is worth noting that the right to forest deduction arises only from the trade in immovable forest property. For example, death estate shares transactions are not real estate transactions, but movable property transactions.
If a forest entitled to deduction is transferred to a new owner with a gratuitous yield (inheritance, gift, matrimonial right) and the donor has not used the forest deduction, the unused deduction will be used by the new owner.
In a gift-type forest property transaction, the new owner transfers a proportion of the previous owner's unused forest deduction in proportion to the gift's relative share. In a fair value forest transaction (purchase price over 75% of the fair value), the unused forest deduction of the previous owner is not transferred to the new owner in any way, but the new forest transaction naturally results in a new forest deduction.
The monitoring of forest deductions is taxpayer-specific; that is, the forest deduction base of all forest properties of the same taxpayer as well as used and unused forest deductions are monitored as a single entity. The same person can be a taxpayer, for example, alone and in one or more consortia. In this case, the monitoring of forest deductions must, of course, be kept separate.
Forest deduction can be utilized at the stage when the property entitled to deduction starts to receive taxable income through the sale of timber or the receipt of some other taxable capital income from forestry.
Forest deduction can no longer be utilized in the last year of forest ownership, because the forest owner who owns the forest entitled to deduction at the end of the year (31 December) has the right to deduction. Nor can the right to deduction be exercised by the holder of the right of possession alone, since the use of forest deduction is tied to ownership. The sale of the right of possession does not create a forest deduction base because it is a sale of movable property.
The forest deduction used is added to the capital gains or capital loss in the following cases:
- The forest property for sale is eligible for forest deduction and the seller has used the deduction.
- The forest property is sold to a third party.
- The forest property is sold to a close relative after less than 10 years of ownership.
- The increase may not exceed 60% of the acquisition cost of the sold forest property.
- The used deduction is recognized as income even if no fellings have been made on the forest property for sale.
The forest deduction used shall not be added to the capital gains or capital loss in the following situations:
- The forest property changes hands as a pure gift or inheritance.
- The forest property is sold to a close relative after more than 10 years of ownership.
- The forest property is sold as a nature reserve to the state (ELY Centre).
- The forest property has never been a part of the forest deduction system.
- The forest owner has never exercised the right to deduction.
- The forest property is connected to the joint forest on the basis of shares.
The detailed application instructions on the creation of a forest deduction base, the use of forest deduction and the conduct of both used and unused forest deductions in different ownership changes can be found in the in-depth forest deduction instructions on the Finnish Tax Administration's website.