1031 exchange land for mineral rights

How to 1031 Exchange Land for Mineral Rights

The sky’s the limit when you have land. With the proper zoning, construction team, and dream, anything can be accomplished when you pick the right property.

With this in mind, land is a hot commodity all across the country. Whether or not you were planning to develop the land, attractive lots are sure to pique the interest of buyers with dreams of their own.

One of the best ways to maximize the return on an investment after selling land is to use a 1031 exchange. Today, exchanges can be used to purchase highly profitable mineral rights, which can lead to a steady stream of mineral royalties.

In this article, we will explain all of the steps necessary to 1031 exchange land for mineral rights.

How to Sell Land

This may come as a surprise, but selling land is actually quite a bit different than selling a home. Whereas houses are sold with the land beneath them, the market for empty lots is a lot different than traditional real estate.

More often than not, the sale of land takes considerably longer than the sale of homes, buildings, and other kinds of real estate. With that said, landowners are allowed to sell their land on the open market, using any and every sales and marketing technique that they choose. Most commonly land sales are made through:

  • Yard Signs
  • Online Listings
  • Speciality Realtors
  • Word of Mouth
  • And more

Determining the Value of Your Land

The first step to selling your land is putting a price on it. Unless you are “pricing to sell,” it is a critical mistake to undersell the value of your land. More often than not, property prices will rise in areas with sustained development.

The value of a lot of lands is determined by:

  • The Size (Acreage)
  • The Location
  • Accessibility
  • Existing Structures
  • Zoning Laws and Requirements
  • Property Taxes
  • And More

Thankfully, most newly sold or developed land is usually neighbored by similar plots. In your city and across the country, it is very easy to check online listings in order to see the approximate value of similar properties. Finding an existing plot for sale that has the same features as your land is a good way to quickly see a reasonable value to price your property.

Taxes Paid on the Sale of a Land

No matter how much you sell your land for, there will still be at least some taxes taken from the sale and given to local and federal governments. Although it varies greatly between areas of the country, most people pay the following taxes when selling a piece of land:

  • Ordinary Federal Income Tax
  • Capital Gains Tax
  • Sales Tax
  • Local Taxes
  • And More

Here, the difference between land and a home is critical. Whereas selling your home will likely exempt you from paying capital gains tax, this is only because a special rule is made for selling the property that you live on. In the case of land or a vacant lot, more often than not, a capital gains tax is imposed.

How to 1031 Exchange Land

With a 1031 land exchange, paying some or all of the capital gains tax imposed on the sale of a lot of land can be completely avoided. A 1031 exchange is an IRS-designated investment strategy in which selling property then quickly buying a similar property allows investors to be exempt from paying capital gains taxes.

Like-Kind Properties for 1031 Land Exchange

A 1031 exchange gets its name from “exchanging” the sale of a property for another one of “like-kind.” Under the laws imposed by the IRS, land is a fairly easy to define property, which shares the features and investment potential with many other like-kind purchases.

Like-kind properties for 1031 land exchange include:

  • Mineral Rights
  • Homes and Apartments
  • Malls and Strip Centers
  • Trailer Parks
  • Water and Ditch Rights
  • And More

1031 Land Exchange – Timeline

Even before you sell your land, you may want to begin thinking about the like-kind properties that you would like to purchase. Because the sale of land can take a considerable amount of time, knowing the direction you would like to take with your investment is extremely important once the land is sold and 1031 timelines must be met.

To start, the IRS requires that at least one like-kind property must be identified within 45 days of the sale of a piece of land. After that, the new property must be purchased within 180 days of the sale in order to qualify for a valid 1031 land exchange.

For additional requirements, please see our 1031 Exchange Rules and Requirements Page.

Using an Intermediary to 1031 Exchange Land

A 1031 exchange intermediary is strongly recommended for both first time and experienced investors when selling land. Utilizing the resources and knowledge of a professional will not only help 1031 timelines be met, but will also likely maximize your investment.

How to Purchase Mineral Rights and Royalties?

With mineral rights and royalties, former landowners are able to reinvest their money into the subsurface rights of a different property. In doing so, oil and gas companies leasing the land care are required to send a mineral royalty check as a fixed percentage of the monthly sale of oil, gas, or other natural resources from the property.

Mineral rights may be intimidating to first-time buyers, as the property may never even be visited by the investor themselves. Speaking to a professional about mineral rights and royalties is strongly advised in order to best explore your options.

Why 1031 Exchange Land for Mineral Rights?

The sale of land can be best reinvested by 1031 land exchange for mineral rights to avoid capital gains taxes. Even if it takes a few years to sell your land, quickly identifying mineral rights and royalties and purchasing them with a 1031 exchange can be a highly profitable venture.

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