How to 1031 Exchange Mitigation Credits into Mineral Rights and Royalties

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Owning mitigation credits is an incredible way to diversify your wealth for a worthy cause. Mitigation banking helps keep our country’s wetlands and healthy and abundant. Whether your mitigation credit has significantly raised in value, or you are simply not in it for the money, they can be sold or traded for other personal assets.

In the United States, taxpayers have the opportunity to utilize a 1031 exchange in the sale mitigation credits. In doing so, capital gains tax that would have otherwise been applied is withheld, so long as taxpayers invest in a new like-kind asset.

While money can essentially be placed anywhere, if your dream to restore a wetland area has been surpassed by the desire to earn more income, you may want to explore the option of investing in mineral rights. With a 1031 exchange, migration credits can be sold at the highest legal profit margins, while reinvesting in long term mineral royalties. In this article, we will break down the process step by step to answer questions and help you get started.

How to Sell Your Mitigation Credits

Although it requires a significant amount of time and effort, it is generally fairly easy to sell mitigation credits in the United States. In fact, if you are considering reinvesting mitigation credits into the oil and gas industry, these companies may actually be your target market.

Extraction of the earth’s natural resources requires mitigation rights, so oil and gas companies are often willing to pay a large lump sum for the opportunity to explore what was otherwise protected territory.

Determining the Value of Your Mitigation Credits

As more and more of the resources in the United States are depleted, mitigation credits have actually been rising in value steadily since their introduction on the market. With serious improvements to land and water systems, the value of a mitigation credit can double or triple its value in a short period of time.

While selling to an oil and gas company is an option, mitigation credits can also be sold to other private investors that want to continue the site’s restoration and conservation efforts. If this is the case, values can range dramatically based on:

  • Percentage ownership
  • Habitat acreage
  • Project age
  • Intended uses
  • Location
  • And more

Taxes Paid on the Sale of Mitigation Credits

If you make a considerable amount of cash from mitigation banking, sales from mitigation credits must be reported on your personal income tax each year. On top of this, capital gains taxes may be applied if the gain is significant enough. As mentioned above, capital gains taxes can be deferred using a 1031 exchange.

Selling Mitigation Credits with a 1031 Exchange

A 1031 exchange essentially allows American taxpayers to “trade” their assets for one another without having to pay for capital gains taxes that would have been applied. If the new asset is of less value then the mitigation credits, than it is possible for only some of the capital gains taxes to be deferred. For this reason, many investors see 1031 exchanges as a chance to reinvest in a more valuable or cash flow positive asset.

Mitigation Credits Like-Kind Properties

By definition, mitigation credits are not considered to be tangible personal property. For this reason, they can be exchanged for other intangible assets such as:

  • Mineral rights and royalties
  • Intellectual property
  • And water and ditch rights.

Beyond this, the IRS is typically lenient when it comes to the true definition of “like-kind” properties. In fact, mitigation credits can be used to purchase many physical assets including:

  • Farms
  • Apartment buildings
  • Malls and retail shops
  • Condos
  • And more

Mitigation Credits 1031 Exchange Timeline

As soon as a mitigation credit is sold, a taxpayer’s eligibility for a 1031 exchange begins. In total, the investor must purchase a new asset within 180 days of the sale, after identifying at least one potential property within 45 days. In total, 3 properties can be identified for consideration in a 1031 exchange, regardless of their value.

1031 Exchange Intermediaries for Selling A Mitigation Credits

With strict deadlines, fine print, and a whole lot to consider, 1031 exchanges are best completed with the help of an intermediary. Having a legal representative on your side will not only streamline the process of the exchange, but may also be able to help in the identification of a new asset. If you are considering selling your mitigation credits to an oil and gas company, then it is strongly recommended to work with an experienced oil and gas industry 1031 exchange intermediary.

Why Purchase Mineral Rights and Royalties?

If you own mitigation credits or have been interested in mitigation banking for a while, then you are probably well aware of what mineral rights are and how they work. For those new to the idea, mineral rights represent the ownership of the subsurface of a property.

Although mineral rights are not available in many countries throughout the world, Americans have the opportunity to sell or lease mineral rights for a tremendous financial gain. If valuable natural resources are found on the property, many extraction companies may be interested in working with a mineral rights owner.

In a mineral rights lease, mineral rights owners are entitled to a fixed percentage of the profits on resources sales forms the property. Here, it is crucial to negotiate and maximize your mineral rights share so as to earn the most money in your future royalty payments.

Conclusion

In conclusion, the endurance of mitigation banking has provided many mitigation credit owners the opportunity to sell their shares and earn a tremendous amount of income. In the United States, smart reinvestment with a 1031 exchange, enables taxpayers to keep more of their money while reorganizing their wealth. Today, there are few and far better investments than mineral rights.

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