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1031 exchange farmland

1031 Exchange Farmland [Ultimate Guide]

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So you’ve finally done it, you have decided to sell the farmland. Do you have a large sum of money heading towards your bank account? Unfortunately, federal capital gains taxes are applicable. Federal capital gains taxes can take up to 20% of the sale price from your farmland. This is depending on your annual salary,

In this article, we will outline the steps necessary to 1031 exchange farmland into mineral rights and royalties completely tax-free.

How to Sell Farmland

Of course, you can 1031 exchange farmland only once the property is sold. There are a few ways to go about this. On one hand, you can try selling your farmland by yourself. On the other hand, you can utilize a specialized broker or real estate agent. This is for them to do all of the work for you (at a price, of course). As there is a considerable amount of work to, we strongly suggest working with a professional.

Determining the Value of Your Farmland

For most people, farmland includes most if not all of an individual’s assets. What to do to determine the final sale price (and sales tax) associated with farmland? The property and everything it contains should go through appraisal. Most commonly, the sales price of farmlands in the United States is largely by:

  • The Amount of Land
  • # of Buildings and Size (Homes, barns, storage, etc.)
  • Equipment (tractors, irrigation systems, bailers, etc.)
  • Livestock (cows, horses, etc.)
  • Supplies and Inventory (crops, fertilizer, etc.)

Taxes Paid on the Sale of Farmland

All in all, the sale of farmland can bring in a considerable amount of money. With that in mind, it is always going to be taxable in some form or another. Currently, the following taxes are applicable to the sale of farmland in the United States:

  • Federal Income Tax
  • Recapturing of Depreciation
  • State Taxes
  • Federal Gains Tax

All in all, the amount of tax imposed on the sale of farmland can range anywhere from between 20% to 50%. This is depending on all of the variable conditions. With that, eliminating any of the taxations is a surefire way to save a bit of money during the sales process.

1031 Exchange Farmland

As we mentioned earlier, using a 1031 exchange is a great way to lower or eliminate capital gains taxes on the sale of farmland. A 1031 farmland exchange is useable when another property that is under purchaseis similar to it. In buying a “like-kind” asset, former farmland owners are not required to pay capital gains tax on the sale of their estate.

1031 Exchange Farmland – Requirements

In order to qualify for a reduction in capital gains tax with a 1031 farmland exchange, the following timeline must be true:

  • The same taxpayer sells and purchases both assets.
  • New properties must be identified within 45 days of the sale of the farmland.
  • The new property must be purchased within 180 of the sale of the farmland.

Of course, to qualify for a full elimination of capital gains tax, the new property must be of equal or greater value (i.e. trading up). Up to three properties can be identified as potential purchases regardless of their value. For more information on the rules and regulations for using a 1031 exchange, feel free to read our detailed page on the 1031 exchange process.

Farmland Like-Kind Properties

In order to 1031 exchange farmland, the same taxpayer must purchase a new property that is similar to the old one. For the sale of farmland, there are many options within the realm of property that can be exchanged for, completely tax-free. Most commonly, farmland sales are exchanged for:

  • Better Farms
  • Livestock
  • A Home or Apartment
  • Water and Ditch Rights
  • Vacant Land
  • Mineral Rights and Royalties

Using an Intermediary to 1031 Exchange Farmland

In order to make sure the process goes as smoothly as possible, using an intermediary to 1031 exchange farmland is the smartest way to go. Utilizing the knowledge and resources of a licensed professional will not only help you save the most on taxes but will make the process easier along the way.

Ranger Land and Minerals has over 100 years of combined industry experience transforming assets into profitable mineral rights and royalties through 1031 exchanges. Our team of professionals is here to help leverage your farmland for the best possible mineral rights and royalties.

Maximizing Return on Investment

Once you sell the farmland, putting the money into something brand new such as mineral rights or royalties can be very intimidating. However, with the right purchase, your farmland very well may transform into a passive stream of income, profitable beyond any back-breaking labor tending to crops or livestock.

Purchasing Active Mineral Rights: With active mineral rights, cash flow is generated each month as mineral royalties are divided among stakeholders every single month. 1031 Exchanging for active mineral rights can lead to an immediate and ongoing income stream.

Purchasing Non-active Mineral Rights: Alternatively, mineral rights in high-production areas can also be profitable even if they are not currently being used by an oil or gas company. Non-active mineral rights can be bought and sold for profit, or retained through an oil and gas lease. Depending on your negotiation, new oil and gas leases can lead to steady income for years on end.

What to 1031 Exchange Farmland For

More than anything, investments into mineral rights and royalties are a great way to reinvest the capital derived from the sale of farmland. Mineral rights entitle landowners to the valuable resources found below the earth’s surface. Mineral royalties are earned when those resources (such as coal, natural gas, or oil) are extracted and sold in the marketplace.

Ultimately, selling your farmland is a tough decision. Once you’ve done it, however, your next step shouldn’t be so tough. 1031 exchanging farmland to purchase mineral rights or royalties is a great way to reinvest your money without having to pay a capital gains tax. With the right purchase, mineral rights can be a very valuable asset in any portfolio.

NMA and NRA

Net Mineral Acre (NMA) vs. Net Royalty Acre (NRA)

In oil and gas leases, there are two commonly confusing designations for measuring different things. Both net mineral acre and net royalty acre is an important part of an oil and gas lease. If you are thinking about leasing your mineral rights, knowing the definition and difference between these two terms is important in fully understanding your contract.

What is a Net Mineral Acre?

A net mineral acre (abbreviated NMA) is a term to describe a person’s percentage ownership of a larger parcel of land. Here is an illustration.

Let’s say you own ¼ mineral share of a 100-acre property. This means that you own 25 net mineral acres. If you owned the entire property, your net mineral acres would be equal to the gross mineral acres, at 100. However, most mineral leases are among several mineral rights owners.

What is a Net Royalty Acre?

A net royalty acre (NRA) is a measurement of the cash flow that you receive from the sale of oil and gas on a per-acre basis. In many oil and gas leases, a royalty percentage of about ⅛ (12.5%) was originally common for mineral rights owners, however, this has changed over time.

To calculate your NRA, first find your royalty rate and divide it by ⅛ (0.125). Let’s say that your royalty rate is 10% of the share of oil and gas sales. Here, 0.1 divided by 0.125 is equal to 0.8. From there, multiply that number by your NMA to get your total NRA. In the example above an NMA of 25 multiplied by 0.8 would equal an NRA of 20.

The Difference Between A Net Mineral and Net Royalty Acre

Net mineral and net royalty acres define by different terms. It defines an interest in land, but cannot be equated to dollars and cents. Net royalty acres are much more commonly used in mineral lease transactions because they can fully illustrate the royalty potential of a plot of land.

Image Credit: BLM Wyoming

mineral interests

The Different Kinds of Mineral Interests

It’s no secret: oil and gas royalties are a great way to generate financial income if you own mineral rights. Whenever an oil and gas lease is signed and operations begin, mineral rights owners can gain mineral interests as a portion of the sale of resources extracted from their property.

Depending on the contract (and relationship to the operation), mineral interests are generally distributed in one of three ways. These include:

  • Royalty Interests (RI)
  • Overriding Royalty Interests (OR)
  • Working Interests (WI)

Royalty Interests (RI)

Royalty interests are the most simple and common form of mineral interest payments for mineral rights owners. In this sense, they are also commonly known as lessor’s royalties for landowner’s royalties. Generally speaking the amount of a royalty interest payment is based on a fixed percentage. It is outlined in the mineral rights lease as a portion of the proceeds from the sale of resources.

Overriding Royalty Interests (OR)

Overriding royalty interests, also known simply as overrides, do not affect mineral rights owners. Although they may be seen in the supporting documents for a royalty interest payment, overriding royalty interests are generally reserved for landmen, surveyors, or other individuals and entities that aid in the production of oil but do not own the land. You can read more here.

Working Interests (WI)

Lastly, working interests are another kind of interest payment for people and entities that help produce and sell oil or gas. Working interests are operating interests or leasehold interests. They are typically reflective of the labor and equipment required to drill and extract resources from the land.

It is rare that mineral rights owners will receive any working interests, however, there is no standard oil or gas contract. In some instances, a mineral rights owner’s ties with oil and gas operations or existing oil wells may lead to the acculturation of working interests atop a steady stream of monthly royalty interest in a mineral rights lease.

If you have further questions, feel free to reach out to us here.

division order for mineral rights

What is a Division Order for Mineral Rights?

If you are thinking about signing an oil and gas lease, then you may hear about and wonder what is a division order. For the first time mineral rights owners, nearly any legal document can be intimidating, especially if you believe that the oil and gas company does not have your best interests in mind.

The truth is, however, that division orders are a necessary part of determining the amount of money you can receive from oil and gas royalty payments. Below, we will break down everything you need to know about division orders in mineral rights leases.

Division Order Definition

A division order, also known as a division of interest, is a written agreement that outlines how the financial proceeds of an oil and gas operation are distributed. Division orders typically provide individuals with a defined, monthly, fixed percentage on a company’s exploration and sale of crude oil or natural gas.

Why are Division Orders used for Mineral Rights?

Division orders are necessary in order to define and enforce what a mineral rights owner is entitled to in a mineral lease. Within the division order, fixed percentages of oil and gas profits are defined between the mineral rights owner and the oil and gas company.

In many cases, there are multiple mineral rights owners on large oil wells that stretch across many property lines. In these instances, division orders are even more necessary, as they fully outline the exact percentage interests each property owner should be paid.

What is in a Division Order for Mineral Rights?

Every mineral rights contract and division order is a bit different. However, there are a few things that must be in every division order agreement in order to make it officially and legally binding. The agreed terms include:

● Lease terms, such as length and special details

● Royalty rates (fixed percentages)

● Bonus payments (typically upfront)

● Clauses in the event of a delay or abandonment of lease

Ultimately, even in the simplest terms, division orders should also be reviewed by a mineral rights professional before they are signed. It is important to have a qualified person to review your division order in order to negotiate the best rates and payments to lease your mineral rights.

paid up oil and gas lease

Paid-Up Oil and Gas Lease – What Are They & Why are They Used

When it comes to negotiating a mineral rights lease, there are a lot of industry terms and lingo that require a full understanding before any contract agreement should be signed. One of the most common phrases questioned during oil and gas lease negotiations is the term “paid-up.” In this article, we will define paid-up oil and gas lease, in addition to exploring why and how they are created.

What is a Paid-Up Oil and Gas Lease Agreement?

A paid-up oil and gas lease is an agreement between a mineral rights owner and an oil and gas company, in which one payment is made at the beginning of the contract. This is the only amount of money that the gas company will pay the mineral rights owner until drilling operations begin. From there, the mineral rights owner may receive oil and gas royalties from the sale of resources extracted from their land.

Why Do Oil and Gas Companies Use Paid Up Leases?

Oil and gas companies will typically enter paid-up oil and gas lease agreements as an incentive to entice landowners to enter into a contract. If you receive an unsolicited offer with an attractive upfront payment promised, it is important to be wary of deals that seem “too good to be true.”

However, paid-up leases are extremely popular as the upfront payment is seen as a sort of “signing bonus” for entering the agreement. Occasionally, oil and gas companies will sign lease agreements that expire before they even explore their acquired land. With a paid-up lease, mineral rights owners are guaranteed at least some money in exchange for their property’s value.

Conclusion

Ultimately, if you’re wondering whether or not to sign a paid-up lease agreement for your mineral rights, you must weigh your options. If the lease agreement looks good, you may be able to receive a small sum of cash and a future of plausible oil and gas royalty payments. However, if you are primarily interested in an upfront payment, you may want to consider selling your mineral rights outright. Compared to paid-up oil and gas leases, selling mineral rights is a much quicker way to generate larger capital gains.

oil-company-land-lease-mineral-rights-pennsylvania

An Oil Company Wants to Lease My Land, What Should I Do?

Leasing your land to an oil and gas company can earn you large amounts of money. This is usually for the sale of resources owned within your mineral rights. So much so, that many people seek out oil and gas companies in the hope that their mineral rights may be valuable in some way. An example is having mineral rights in Pennsylvania or in Texas. This is somehow already a profitable trend (more about this on Option 2 below).

Of course, entering into a contract with a landman can be extremely complicated and intimidating with some wondering if it is all worth the hassle. Below, we will outline your options after being approached by an oil company to lease your land.

Option 1: Lease Your Mineral Rights

Obviously, your first choice here is to sign the agreement. The oil company may have promised a large amount of money if you sign immediately. That may just be too hard to pass up. Of course, mineral rights leases are highly negotiable, which means that you do not have to hastily agree before fully analyzing the contract terms.
What if you’re approached by an oil company out of the blue? It is a good rule of thumb not to sign the first thing they give you. Instead, seek a mineral rights lawyer or mineral rights expert. They will look over the agreement and set you up for success.

Option 2: Do Not Lease Your Mineral Rights

If you don’t like the idea of having an oil-drilling operation on your land, then simply don’t sign the contract. In mineral-rich states like Texas, Pennsylvania, and Colorado, some companies may try everything they can to get you to sign the dotted line, however as the mineral rights owner, you can ultimately decide the fate of your land.

A great way to assess a location is to just do background research.

Let’s say try searching “mineral rights Pennsylvania” or “mineral rights pa” online and see some results. If you see that it is viable to have your land leased with great returns, go for it.

Option 3: Sell Your Mineral Rights

If you do not want to lease your mineral rights, but still want to profit from your property’s valuable resources, then you may want to consider selling outright. You can either sell your entire estate (surface and subsurface rights) or simply sell your mineral rights. If the oil and gas company wants to lease your land, that means someone out there would be interested in purchasing it. That way, you can earn a more immediate lump sum.

If you have further questions about mineral rights, feel free to reach out to us here.

oil and gas lease form

Oil and Gas Lease Form 88

In this world, there is no true “standard” oil and gas lease. That is why Form 88 is about as close as it gets. Throughout the infancy and adolescence of the United States oil and gas industry, oil and gas lease Form 88 was considered the “standard form”. In this article, we will discuss what makes it up and how it is useable today.

What is this form?

This form is also known as the “Printed Form,”. It is a signable portion of an oil and gas lease. In full, the proper term of Form 88 is, “Standard Producers 88 Oil, Gas, and Mineral Lease,”. Do you want a simpler term? Let’s call it the “Producer’s 88”.

The Producer’s 88 is the most widely used form for American oil and gas lease agreements, however, this does not mean that it is the best for individual oil and gas leases.

Oil and Gas Lease, Producers 88 Printed Resources

Would you like to see a sample of what a standard Producers 88 form looks like? Well, there are many resources available online. You can easily copy or down load the form while only substituting information for drilling locations, involved parties, and specific lease terms.

Although there are many variations of the document floating around, here is one resource to quickly see a standard form.

Should You Use a Standard Form?

Today, oil and gas leases have never been more complicated. To tell the truth, it is very rare that the “standard” Producers 88 form is ever used as-is. The Standard Producers 88 grants essentially full access to a property’s surface rights. It is for the oil company to improve the extraction. This may not sit well with some people. Additionally, new technologies in drilling have led to complicated land issues, making some of the 88’s language to be a bit obsolete.

Ultimately, if an oil or gas company asks you to sign a “standard” form, it is very important you give it a second glance before singing something potentially detrimental.

If you have further questions about the topic, feel free to reach out to us here.

oil-gas-royalties

Oil and Gas Royalties: What You Earn with a Mineral Lease

For some people, oil and gas royalties are second nature, with producing properties generating wealth for years to come. For others, oil royalties and mineral leases are both foreign terms.

If you own your mineral rights, then you can potentially earn a significant amount of oil and gas royalties.  This is by entering into a mineral lease. In this article, we will lay out some of the most basic information about oil and gas royalties. Ready to get help for you to understand how a mineral lease works?

What is a Mineral Lease?

A mineral lease is an agreement between a landowner and an oil and gas company. It is also known as an oil and gas lease. For many larger operations, this agreement can be expanded between multiple property owners.

In a mineral lease agreement, the mineral rights owner still retains possession of the mineral rights while they are leased to the oil or gas company. However, for the duration of the contract, the oil and gas company essentially rents the property’s subsurface in order to explore and extract minerals.

What are Oil and Gas Royalties

Is your mineral lease up and running and the oil company is able to extract resources? Then you can begin to earn these royalties. Oil or gas royalties are a monthly payment to operation stakeholders as a percentage share from the sale of the extracted resources.

Here’s an example to help fully illustrate how these royalties work. Let’s say your mineral lease entitles you to 5% of the profits from oil sales extracted from your property. In March, the company is able to drill and sell $50,000 worth of crude oil. Here, you would earn $2,500 in oil royalties.

Conclusion

In the United States, one of the best ways to earn an income from your land is by entering into a mineral lease agreement. As you can see from the information provided above, successful oil and gas drilling operations can lead to significant oil and gas royalty earnings for mineral rights holders.

fee simple defeasible vs absolute

Fee Simple Defeasible vs. Fee Simple Absolute: What’s the Difference?

Property deeds can be extremely complicated. What about when you are purchasing a new asset? Well, it is extremely critical to fully understand what exactly it is that you are buying.

In property transactions, fee simple defeasible and fee simple absolute are two of the most common acquisitions. In this article, we will define these terms. After that, we will be helping you understand the difference between the two and what they mean for mineral rights.

What is a Fee Simple Absolute?

A fee simple absolute is the absolute highest form of property ownership that one can have. In a fee simple absolute, a person owns a property until he or she transfers it to someone else. It is usually through sale, gift, or inheritance. Here, property owners own surface rights as well as mineral rights, without any limiting conditions.

What is a Fee Simple Defeasible?

On the other hand, a defeasible is a type of property ownership in which the assets can be taken away from the owner. This is after the occurrence (or-non occurrence) of a special event. Fee simple defeasible can be broken down into two very similar categories: “fee simple determinable” and “fee simple subject to condition subsequent.”
In order to paint a better picture, here’s a good example of a defeasible: I sell you my property for a fee simple defeasible with the condition that you create an oil well on the land in the next five years. If you fail to set up the oil well in the predetermined time period, then the ownership will revert back to me.

Fee Simple Defeasible vs. Fee Simple Absolute

As you can see, the difference between a fee simple defeasible and a fee simple absolute is quite easy to see. If the previous seller retains any conditional interest in the property, then the deed is most likely to be a fee simple defeasible. For most people, however, a fee simple absolute is the easiest and most common type of property ownership. Here, all deals are final and the new owner is free to do as they wish with the property.

If you have further questions, feel free to reach out to us here. 

1031 exchange business to mineral rights

Retaining, Leasing, or Selling Inherited Mineral Rights

When someone passes away, mineral rights are often included as an asset of said person’s estate. If you inherit mineral rights, you may not be sure what to do next. In this article, we will outline a few options for what to do with your newly bequeathed mineral rights and if you should retain, lease, or sell inherited mineral rights.

Step 1: Fully Transfer the Rights

If you are the rightful heir to a recently deceased person’s mineral rights, then you will have to transfer the ownership into your name. Here, you can contact a title or insurance company to conduct the search for the proper paperwork.

In some cases, in which you inherit both the surface and subsurface rights of a property, you may sign a new fee simple estate. Otherwise, your name will be added to the mineral deed.

Step 2: Identify any Existing Contracts

Let’s say you inherited active mineral rights that are currently leased to an oil and gas company. In order for you to receive any oil and gas royalties owned by the deceased, the will executor can contact the lessee in order to put your name on future checks. Once the lease expires, it will be up to you whether or not to renew the terms.

Step 3: Retain, Lease, or Sell Inherited Mineral Rights

Once everything is in your name, then you are free to do as you wish with your inherited mineral rights. In some parts of the country, your mineral rights may not be worth very much money. However, there are also plenty of regions in the US in which mineral rights can be very valuable if your land may contain oil, natural gas, or another precious resource.

Here, you can weigh your options and decide what to do with your new asset. Retaining mineral rights may be your only option for undesirable land, or else entering into a contract agreement may lead to great financial compensation. In a mineral rights lease, you can earn royalties from any resource extracted and sold from your property. If you choose to sell your mineral rights outright, you can potentially pocket a large lump sum of cash to help with retirement or the acquisition of another property.