They paved paradise and put up a parking lot. Then you bought it.
Parking lots are a great way to earn relatively passive income. With an attendant, good location and enough space for plenty of cars, parking lots can be a very profitable venture.
With this in mind, selling a parking lot can lead to an enormous cash flow. Today, one of the best ways to reinvest this money is by using a 1031 exchange.
With a 1031 exchange you can turn the earnings from your parking lot into another great passive income stream: mineral rights in royalties.
In this article, we will outline how to sell your parking lot and use a 1031 exchange to earn the most from mineral rights and oil and gas royalty payments.
How to Sell A Parking Lot
First, let’s sell your parking lot. As a relatively simple operation, small business owners and first time entrepreneurs may be very interested in purchasing your lot. Of course, there are a few different reasons someone may want to buy a parking lot. These include:
- Parking for Local Businesses or Apartment Buildings
- Daily Rates / Hourly Parking
- Event Parking (Nearby Stadiums or Venues)
- Demolitions and Land Repurposing
- And more.
With this in mind, you have the option of selling your parking lot to a neighboring person or business as well as individual owners regardless of their location. If you have a parking lot downtown in a city, chances are that people have actually been approaching you with interest in the land.
Determining the Value of Your Parking Lot
Now before you sell to the first interested party, it is a good idea to get a ballpark estimate on the approximate value of your parking lot. To figure this out, take a look at online resources and local government records to see the property’s history as well as the history of similar lots in your area.
Parking lots come in all shapes and sizes, but their value is largely determined by these factors:
- Size Of Land
- Number of Levels (Garages)
- Existing Structures (Toll booth, etc.)
- Constructions and Maintenance History
- Traffic / Current Tenants
- And More
If you can identify a recent parking lot sale that shares some of these similar traits, that will give you an approximate value for your parking lot. With that in mind, your property is only as valuable as someone else is willing to pay for it.
Taxes Paid on the Selling Parking Lots
After you sell your parking lot, there will likely be a large sum of money headed in your direction. Unfortunately, federal and local governments take their share from your sale. Taxes paid on the sale of a parking lot include:
- Federal Income Taxes
- Sales Taxes
- Local Taxes
- Capital Gains Taxes
- And More
Selling Parking Lots with a 1031 Exchange
If you have earned enough money in your tax bracket to constitute a capital gains tax on the sale of a parking lot, this can be avoided if you purchase a new property with a 1031 exchange.
A 1031 exchange eliminates capital gains taxes paid on your income, so long as the money is reinvested in a similar or more expensive “like kind” property.
Parking Lot Like Kind Properties
In the eyes of the all powerful IRS, there are many properties that can be considered similar enough to a parking lot for use in a 1031 exchange. After all, a parking lot is essentially just an ordinary piece of private property that can often be repurposed and rezoned without much trouble.
Parking Lots can be 1031 exchange into:
- Mineral Rights and Royalties
- Apartment Buildings
- Malls and Strip Centers
- Golf Courses
- Trailer Parks
- And More
Selling Parking Lots – 1031 Exchange Timeline
After you sell your parking lot, there is a 45 day window to identify your first like-kind property for a 1031 exchange. Failure to do so will null your chances of avoiding capital gains taxes.
Thankfully, the first identified property does not have to be the one you purchase. 2 more properties can be identified regardless of value. After 180 days, the new property must be purchased in order to qualify for a 1031 exchange.
1031 Exchange Intermediaries for Selling A Parking Lot
A 1301 exchange intermediary is highly recommended in order to meet deadlines, file proper paperwork and get the best overall reinvestment after selling a parking lot. It also is extremely helpful to hire an expert in the industry in which you are hoping to purchase a new property.
Why Purchase Mineral Rights?
Mineral rights are similar to parking lots, but perform at a much larger scale. Whereas parking lots can lead to monthly tenant payments, active mineral rights can lead to large monthly mineral royalty payments.
With mineral rights, you have the opportunity to earn a fixed percentage of the sale of oil, gas, or any other valuable natural resource as it is found, extracted and sold.
How to Maximize Your 1031 Exchange with Mineral Rights
Like parking lots, mineral rights come in all shapes and sizes. If you are new to the concept, it is always recommended to speak to a mineral expert before signing into an oil and gas lease or mineral rights contract.
Ideally, you will want to buy mineral rights that are either active or soon to be active. When this is the case, you will immediately begin to receive oil or gas royalty payments throughout the life of the operation.
At the end of the day, parking lots are a good investment, but selling yours can pave the way for higher earnings with mineral rights. As oil and gas become more and more valuable with increased population and resource depletion, owning mineral rights is one of the best ways to invest your money from the sale of a parking lot.