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How to 1031 Exchange Timberland into Mineral Rights & Royalties

When the word “timberland” is brought up today, most people’s first associations that come to mind are usually not related to the term’s original definition. To many, Timberland is just a footwear brand. To others, Timbaland is a famous American music producer. To savvy investors and industry workers, however, Timberland is simply a privately owned patch of property designed to grow and harvest lumber.

Timberland is a great asset for producing massive amounts of wood above a property’s surface that can be used as fuel, framework, and furniture. With this in mind, timberlands are commonly purchased, developed, and sold for large profits.

In order to maximize the sale of a timberland’s profits, taxpayers can use a 1031 exchange to defer the capital gains taxes on the sale. In today’s resource-scarce world, we recommend investors turn below the surface of the earth for their next investment with mineral rights.

In this article, we will outline the steps to take in order to sell timberland and utilize a 1031 exchange to purchase mineral rights.

How to Sell Your Timberland

The first step to using a 1031 exchange is to sell your property. Selling timberland has been commonplace since before the United States was even founded, so there are many long-standing systems in place for finding a buyer. Today’s timberlands are owned by a myriad of different kinds of private investors and companies, with many organizations purchasing timberlands with a Real Estate Investment Trust.

Selling Timberlands is rarely done alone, and is usually most profitable with the help of a specialized intermediary. With this said, today’s technology makes it easier than ever to sell timberland in digital marketplaces that can attract buyers from anywhere in the world at any time.

Determining the Value of Your Timberland

One of the most commonly asked questions when selling timberland relates to determining its value. Timberland can be bought and sold on the open market, and sellers can usually see similar lands for sale and base their initial pricing off of that figure.

Timberland is valued on a small set of criteria that includes:

  • Land size
  • Current status and conditions
  • Access and distribution channels
  • Additional income stream (i.e. mushrooms, nuts, etc.)
  • Current profitability

Of course, the price at which you sell your timberland can only be valued at the price of which an individual is willing to pay. Timberland is generally sold to private investors, but can also be sold to national and local land preservation organizations for a large one time deal.

Taxes Paid on the Selling Timberland

If all of your hard work has paid off and you made it big selling your timberland, don’t start counting your money too soon. Nearly 40% of your sale may be taxed by local, state, and federal governments through a variety of rates. Depending on your location, timberland sales can be influenced by:

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

As some first-time investors may not know, a 1031 exchange is an IRS provided opportunity to defer some or all of the capital gains taxes paid on the sale of timberland.

Selling Timberland with a 1031 Exchange

With a 1031 exchange, the sale of timberland must be followed by the purchase of similar property investment. If the new purchase is of equal or greater value then taxpayers are likely able to defer all of the capital gains taxes paid on the sale. To do so, investors must meet timelines and file the proper government paperwork. In most cases, taxpayers will use a 1031 exchange intermediary to ensure that everything goes as smoothly as possible.

Timberland Like-Kind Properties

According to the IRS code, timberland sales are eligible for a 1031 exchange with the subsequent purchase of most kinds of personal property. As both land and the grounds for business, timberland is one of the oldest but most interesting investments available in the United States.

In the event of a sale, a 1031 exchange can be used to purchase:

  • Farmland
  • Water and Ditch Rights
  • Mineral Rights and Royalties
  • Golf Courses
  • Collectibles
  • And more

Timberland 1031 Exchange Timeline

Although it may take a considerable amount of time on the market for a patch of timberland to sell, once it is sold, the clock starts on your opportunity to cash in on a 1031 exchange. Taxpayers have an exact 45 days after the sale to properly modify one eligible, like-kind property. After that, there is a total window of 180 days to purchase a new property that will be permissible for a valid 1031 exchange.

Why Purchase Mineral Rights and Royalties?

Like timberland, mineral rights can be leased to a resource production company. Here, oil and gas companies can go about finding, extracting, and selling the natural resources that are found within your mineral rights designation.

In doing so, mineral royalty payments are signed to your name as a fixed percentage of the operation’s monthly revenue. As an owner of a subsurface asset, you are then in control of renewing a mineral rights lease or selling your mineral rights to another owner.

Here, the main difference is that timberland produces a renewable resource, whereas mineral rights do not. With this in mind, the window for investing in affordable mineral rights may be closing as the resources become more and more valuable. For this reason, mineral rights are a sound investment after selling your timberland.

Conclusion

At the end of the day, timberland is a strong investment. However, this means that developments and improvements can lead to large sales when the time is right. In order to get the most out of your timberland sale, a 1031 exchange can help defer costly capital gains taxes. When considering your new property, mineral rights are among the most similar and smartest reinvestments available today.

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