apartments

How to 1031 Exchange Apartments into Mineral Rights & Royalties

Everyone remembers the day that they bought their apartment. However, not everyone is lucky enough to be able to remember the day they traded their apartment for something even more valuable.

In today’s world, the sale of an apartment anywhere (and on any floor) can lead to a huge influx of cash. As urbanization and property values skyrocket across the United States, the sales prices of apartments follow suit nationwide.

So if you’re ready to explore larger pastures, it just may be the right time to sell your apartment. However, what you may not know is that 1031 exchanges are available to help you keep more proceeds from your sale, by reinvesting the money in another property.

In this article, we will outline the steps that must be taken in order to successfully sell an apartment using a 1031 exchange. After this, we will explore the idea of reinvesting into mineral rights and royalties.

How to Sell an Apartment

In many people’s experiences, selling an apartment is actually an incredibly easy process. Real estate agents nationwide are standing by and ready to show your property to a number of interested buyers, so most people usually choose to hire a professional. Occasionally, large apartment complexes may have an in=house team of managers who are ready and willing to help.

In other cases, selling an apartment without the help of a real estate agent is always possible, and growing in popularity. With linter listings becoming the new norm, smart investors are finding ways to keep as much of the pie from an apartment sale as possible.

Determining the Value of Your Apartment

Of course, to sell your apartment, you will need to determine its value. In a sense, the highest value of your apartment is simply the maximum price that a buyer is willing to pay for the property. In good market conditions, it is always advised to over-value your apartment. However, if you are in an area with many other properties for sale, you may need to undervalue your apartment to find a quicker sale.

The total asking price for an apartment is determined by:

  • The original listing price
  • Apartment age
  • Current market conditions (local and national)
  • Maintenance required
  • Upgrades or remodeling
  • Apartment square footage
  • Building and community amenities
  • Pet policy
  • Floor and access
  • And more

One great thing about apartments is that there are likely many units, just like your own, down the hall or in surrounding areas. With this in mind, it is usually not difficult to obtain recent property appraisals and transactions for apartments similar to yours.

Taxes Paid on the Sale of an Apartment

Now before you start counting your chickens before they hatch, it is important to remember that significant taxes are paid on the sale of an apartment in the United States. This is especially true if your property has appreciated in value considerably since the time you bought it. Across the US, the following are usually paid on the sale of an apartment.

  • Federal Income Taxes
  • Sales Taxes
  • Local Taxes
  • And More

In the eyes of the IRS, the total taxes paid when selling your own home is actually a bit different than other real estate transactions. If your apartment was your primary residence then capital gains taxes are only applied on sales of over $500,000.

Of course, as the cost of living in condensed cities increases on the coasts and throughout the country, more and more apartments are sold at over half of a million dollars. For these transactions, capital gains taxes are applied which can typically be 10’s of thousands of dollars.

Selling Apartments with a 1031 Exchange

With premium apartment sales, capital gains taxes are partially or completely eliminated by using a 1031 exchange. A 1031 exchange is an official IRS process that allows smart investors to essentially “trade” their old property for another investment. If the new purchase is of greater or equal value than the sold apartment, capital gains taxes are completely eliminated.

Apartments Like-Kind Properties

In a 1031 exchange, new property purchases must be of “like-kind” property in order to qualify for the tax savings. Apartments are viewed just like most other physical properties and can be exchanged for:

  • Homes
  • Condos
  • Farms
  • Trailer Parks
  • Mineral Rights and Royalties
  • And more

Apartments 1031 Exchange Timeline

The day after your apartment is sold, the clock starts ticking on your eligibility for a 1031 exchange. In total, taxpayers have 180 days to replace an apartment with a new property in order to qualify for capital gains deferral. Before you kick your feet up for five months, it is important to note that one eligible property must be identified (but not necessarily purchased) within 45 days of the apartment sale.

Why Purchase Mineral Rights and Royalties?

For a lot of parent owners, mineral rights and royalties may be a foreign concept, as they are not typically included in apartment deeds. Rather, like on many other kinds of property mineral rights are available to purchase in order to claim the subsurface resources of a particular plot of land.

With active mineral rights, oil and gas companies lease this land to survey, extract and sell resources like oil, gas, coal, and more. By owning the mineral rights, you are then entitled to a fixed share percentage of each month’s sales, known as a mineral royalty payment.

Knowing this, it is very easy to establish a great passive income stream with the purchase of high-valued mineral rights. If this sounds like something of interest, we highly recommend speaking to a 1031 intermediary that specializes in the field.

Conclusion

At the end of the day, selling your apartment opens a lot more doors than just your former entranceway. By utilizing a 1031 exchange, former apartment owners can save a tremendous amount of money on capital gains taxes that would have been otherwise applied.

Unless finding a new roof over your head is your number one priority, then an investment in mineral rights and royalties is a potentially great way to benefit from the sale of an apartment.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *