To provide additional incentives to nonindustrial private forest land owners in order to increase the supply of merchantible timber for domestic processing, and for other purposes.

Amends the Internal Revenue Code to revise the computation schedule for the alternative tax for corporations to provide a reduction in capital gains tax for eligible sales and exchanges of timber which is at least 25, 50, 75, or 100 years old at the time of cutting.

Allows a tax deduction for taxpayers other than corporations for capital gains on eligible sales and exchanges of timber at 100 percent for timber which is 100 years old, 75 percent for timber 75 years old, 50 percent for timber 50 years old, and 25 percent for timber 25 years old.

Increases estate tax benefits for timberland held for 25 years or more.

Applies passive loss limitations to tree farming activities.

Amends the Cooperative Forestry Assistance Act of 1978 to authorize the Secretary of Agriculture to provide long-term loans as part of the forestry incentive program. Requires the program, to provide information regarding timber harvest techniques and timber marketing options.

Directs the Secretary, in carrying out the forestry incentive program, to conduct two pilot projects (locating one of such projects in the Pacific Northwest region) in areas in which timber available for domestic processing is in short supply, but where there is an abundance of nonindustrial private forest lands.