How to 1031 Exchange Fee Simple Interests into Mineral Rights and Royalties

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With a fee simple interest, you have it all. In the United States, a fee simple interest contract designates the highest level of private property ownership in which a single party owns the land as well as everyone on it, under it, or above it.

If you own your home in the United States, then there is a large chance that you own your property in a fee simple interest agreement, which is also known simply as a “fee simple” or “fee simple estate.” Whatever you call it, this absolute ownership of property is generally only limited by local HOAs or zoning laws.

When it comes time to sell your fee simple interest, hefty taxations can be avoided with a 1031 exchange if the property is not your primary residence. For second homes, abandoned lots, forest land, and more, fee simple interests can be exchanged for new properties completely void of capital gains tax otherwise paid.

In this article, we will break down the process of using a 1031 exchange in the sale of a fee simple interest. When it comes time to identify a new property in the exchange, we will explain how mineral rights can be a wise investment for Americans looking to earn a steady stream of oil and gas royalties.

How to Sell Your Fee Simple Interests

As we mentioned above, and it is worth saying again, a fee simple interest cannot be used in a 1031 exchange if the property is your primary residence. Beyond this, there are little to no restrictions on selling fee simple interests, only typically bound by geographic restrictions. In fact, fee simple interests (or similar ownership structures) in foreign countries can also be sold in the United States with a 1031 exchange.

With this in mind, there are essentially an infinite amount of ways to sell a fee simple interest to another person or larger private and public entities. Online auctions and digital listings are now considered to be the primary avenue for easy and legitimate private fee simple interest sales.

Determining the Value of Your Fee Simple Interests

In many cases, the value of a fee simple interest is an afterthought. Although the exchange is incredibly common, not many people consider the fact that they own their property’s subsurface or limited airways. To determine the value of a fee simple interest, in most residential situations, is simply to assess the value of the property and surface rights.
No matter the category of property your fee simple interest falls into, it is likely that there are many personal properties like it for sale on the market today. Because of this, it is very easy to evaluate the approximate worth of your fee simple interest by finding similar properties based on the following criteria:

  • Land size
  • Local market trends
  • Number of buildings and condition
  • Historic valuations and improvements
  • Mineral rights potential
  • Rezoning possibilities
  • And more

Taxes Paid on the Selling Fee Simple Interests

As property owners know all too well, the sale of a fee simple interest often occurs a large amount of taxation from federal and local governments. Truth be told, high price tag sales can have capital gains taxes at rates up to 20%. For this reason alone, 1031 exchanges are extremely popular with investors looking to defer as much taxation as possible on the sale of a fee simple interest.

Selling Fee Simple Interests with a 1031 Exchange

In a 1031 exchange, you are not selling fee simple interests so much as you are “trading” them for a new property. 1031 exchanges are made up of two individual private property sales transactions, linked together by a few governmental documents.

If the new property is of equal or greater value than the sold fee simple interest, then all capital gains taxes can be deferred, no matter the rate at which they were applied. New properties of lower value can also be purchased in a 1031 exchange, although only a portion of the taxes is then withheld.

Fee Simple Interests Like-Kind Properties

Fee simple interests come in all shapes and sizes, so the IRS allows essentially any personal property (tangible or intangible) to be purchased in a 1031 exchange, capital gains tax-free. In the United States, fee simple properties can be exchanged for:

  • Commercial buildings
  • Rental Properties
  • Farmland
  • Collectibles
  • Mineral Rights and Royalties
  • And much more

Fee Simple Interests 1031 Exchange Timeline

After you sell your fee simple interest, then you must identify at least one eligible property for a 1031 exchange within 45 days of the sale. This does not necessarily need to be the one purchased, but a new asset must be secured within 180 days in order to qualify for a valid 1031 exchange.

1031 Exchange Intermediaries for Selling A Fee Simple Interests

Although we are just scratching the surface here, fee simple interests require a significant amount of time, attention, and paperwork for a successful reinvestment of your wealth. It is advised to seek professional help if 1031 exchanges are new investment territory.

Why Purchase Mineral Rights and Royalties?

Although you can choose to purchase nearly anything on this planet after selling a fee simple interest, mineral rights are a great opportunity for a strong reinvestment. By purchasing the subsurface rights of a portion of land, your mineral rights can pave the way for a steady flow of oil and gas royalties in a successful oil and gas lease.

While mineral rights are already a part of a fee simple interest, they can also be bought and sold independently in a split estate. Mineral rights in a city are far less valuable than mineral rights in a known oil and gas exploration area. For the best-case scenario, selling a fee simple interest for profitable mineral rights is done with the help of a specialized 1031 exchange intermediary.

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