How to 1031 Exchange Business to Mineral Rights

If you’re surfing the internet looking for information on how to 1031 exchange business into mineral rights, you’ve come to the right place.

In this article, we are going to discover everything there is to know about the 1031 business exchange.

Starting, building, and operating a business is one of the most exciting things you can do with your own career. Entrepreneurship is often stressful, but almost always worth it in the pursuit of independent goals and accomplishments.

However, for most business owners, there comes a time when it may be best to “cash out.” Every drop of blood, sweat, and tears that has gone into building a company can be rewarded with a nice cash sale of a business and its assets.

Of course, as one door opens, another door closes. Whereas it may not be in the forefront of most business owners minds, one of the best ways to maximize the capital gain from selling a business is to use a 1031 exchange for mineral rights.

How to Sell Your Business

If you’ve got a great product, people will want to buy it. If you’ve got a great business, people will want to buy that too. More often than not, buyout offers for business come when owners least expect it. For those who are not emotionally tied to their company’s operations, a quick and easy one time sale to a solicitor can yield great results.
For most business owners, however, a sale is not going to come that easy. Instead, companies can utilize business networks and listing sites in order to get the potential sale of the organization in front of as many eyes as possible.

Determining the Value of Your Business

Determining the value of a business may seem intimidating, but there are many hired professionals who actually do this sort of thing for a living. Using real numbers from a company leveraged against current market trends, businesses can evaluate their value through a few specific factors. This includes:

  • Monthly or Quarterly Income and Profit Margins
  • Business Assets and Property
  • Structure of Company (i.e. private vs public)
  • Inventory & Number of Employees

Most commonly, the sale of a business rarely comes in the form of one single check. Instead, liquidating or folding businesses often diversify their portfolio by selling their capital and property assets as in separate entities.

Taxes Paid on the Sale of a Business

As business owners know all too well, taxes are nearly impossible to avoid when operating any organization that exchanges capital. Although different factors are largely determined by the type of business being sold, the following are the most common taxes paid on the sale of a business:

  • Depreciation Recapture
  • Ordinary Federal Income Tax
  • Capital Gains Tax
  • Corporate Taxes (Possibly Doubled)
  • Sales Tax
  • Local Taxes
  • Additional Medicare Taxes
  • And More

Clearly, selling your business is not going to land you a stack of tax-free money on which you can retire. In fact, if a business is primarily made up of physical assets, total taxation of up to 50% is possible on its sale.

Selling Your Business with a 1031 Exchange

If you are paying capital gains taxes on the sale of a business, it is possible to avoid doing so by purchasing another, similar property. By “trading up” and purchasing a new property, the IRS waives capital gains taxes on the sale of a business.

Like Kind Properties for a 1031 Business Exchange

For the exchange of a business, there are many “like-kind” properties that can be purchased under a 1031 exchange. Most commonly businesses can be 1031 exchanged for:

  • Land
  • Property
  • Other Businesses
  • Farms
  • Parking Lots
  • Mineral Rights and Royalties
  • And more

Thankfully, the IRS is not too harsh on the term “like-kind.” In fact, most properties and assets that are designed to continue to produce income will have no issue at all qualifying for a 1031 exchange when selling a business.

Timeline for Using a 1031 Business Exchange

A 1031 exchange delivers considerable tax advantages. However, a specific timeline must be followed in order for the IRS to approve an exchange. Specifically, new properties must be identified within 45 days of the sale of the farm. Beyond that, the new property must be purchased within 180 of the sale of the farm.

A total of three properties can be identified as potential purchases. If more than three properties are identified, then it gets a bit more complicated. For further information about all of the regulations for using a 1031 exchange, you can read our article on the rules for using a 1031 exchange.

Using an Intermediary to 1031 Exchange Business into Mineral Rights

Like in any aspect of a business, working with professional partners is the key to success. The sale of a business is no different. Although you may be working with a broker already, adding a 1031 exchange intermediary to your team is the best way to guarantee that capital sales taxes can be completely eliminated. Using a 1031 business exchange professional is a great way to have the process follow the expected timeline, without any speed bumps along the way.

How to Purchase Mineral Rights After the Sale of Business

When searching for like-kind properties after the sale of your business, we highly recommend working with a mineral rights and royalty broker. Speaking to a professional in the private resource ownership industry is a great way to identify potentially valuable mineral investments.

Why are mineral rights a good investment?

As far as new properties go, mineral rights and royalties are one of the best investments former business owners can make. Whereas active mineral rights will deliver a monthly income stream from the sale of oil or gas, inactive mineral rights can be just as valuable.

How to Maximize Your 1031 Business Exchange with Mineral Rights

If you choose to sell your business and use a 1031 exchange to purchase mineral rights, then you’ve just entered into an entirely new venture that only requires as much attention as you see fit. Actively pursuing mineral rights leases and sales can help you maximize your reinvestment by turning your mineral rights into a monthly profit machine.

Conclusion

Selling a business can be extremely painstaking, but in the end is usually worth it. By transforming a business sale into a 1031 exchange into mineral rights and royalties, former business owners have the opportunity to enter into a whole new way to earn money. For those that are interested, speaking to a professional will always yield the best results.

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