Forest nationalization policies in Asia have often resulted in decreased local property rights over forests and users' short-term exploitative behaviour, leading to degradation of forests. Bhutan's centralized forest management structure was initiated with the Forest Act of 1969. This paper evaluates how nationalization of forests in Bhutan changed forest property rights and associated incentives and disincentives and management outcomes for leaf-litter forests (sokshing) and non-sokshing forests. Using the International Forestry Resources and Institutions (IRFI) research protocols, 12 sites across Bhutan's broadleaf zones were surveyed. Changes in forest property rights were analysed using Ostrom and Schlager's ‘bundles of rights’ framework. The forest nationalization policy changed the array of de jure rights that local people had over both traditionally community-used forests (the majority of forests) and small blocks of sokshings that were usually owned by a household and managed to produce valuable leaf litter for their agriculture livelihoods. There was more compliance with regulations in sokshing than in non-sokshing forests. Non-compliance of local people with forest conservation occurred in areas where the chance of being caught for rule breaking was perceived to be low or the costs of compliance were high. This was almost exclusively the case in non-sokshing forest in the form of widespread but low-intensity illegal tree cutting. The continuing significance of sokshing for agricultural livelihoods serves as a strong incentive for conservation of sokshings by rural people, even though the sokshings are under ultimate state control. The successful management of forests requires minimal difference between de jure policies and de facto practices for which rules that allocate property rights and the way those rules are enforced are important elements. Conservation and management rights of non-sokshing for communities would not only promote local stewardship, but also put the limited capacity of the Department of Forest to best use. Increased deforestation around villages may result, because modern development alternatives may make leaf litter insignificant for agriculture.