How to 1031 Exchange Water and Ditch Rights into Mineral Rights & Royalties

In many regions of the United States, water and ditch rights are becoming increasingly valuable. If you own property with flowing water, then chances are your water and ditch rights could be sold for a tremendous capital gain.
One of the best ways to reinvest the sale of water and ditch rights is through a 1031 exchange. By eliminating capital gains tax, you can then reinvest your sale in a like kind property.

More than anything, mineral rights and royalties are the perfect reinvestment for the sale of water and ditch rights.

What are Water and Ditch Rights?

Water rights, also known as ditch rights or water ditch rights, refer to the private ownership of a waterway for performing “reasonably necessary” operations. Most water and ditch rights are used for irrigation, with limits set on how much of the water can be diverted for agricultural, water treatment and hydroelectric purposes.

How to Sell Water and Ditch Rights

In many states throughout the country, want and ditch rights can be sold as private property. This also infers that they can be gifted or traded to a new owner, just as any other property can be transferred in the United States.
In a split estate, water rights can be sold as a completely separate entity from the land’s property. In fact, there were 90 independent water rights sales in Colorado which totaled to about $57 million of sales in 2015 alone.

Determining the Value of Water and Ditch Rights

So clearly, water rights can be very valub. Now before you sell your water or ditch rights, you should get a ballpark idea of how much they may be worth before speaking to an industry professional.

Water and ditrch rights are evaluated for the following criteria:

  • Location
  • Approximate Volume of Water (Measured in Acre-Feet)
  • History of Similar Sales
  • Reliability of Water Source
  • Logistics and Property Considerations
  • Potential Income Streams From the Water
  • Potential Replacement Costs

More than anything, water and ditch rights are usually valued at prices that coincide with similar water rights sales of the past. To determine the value of your water rights, contact your local government land management office to learn about the history of water and ditch sales in your area.

Taxes Paid on Selling Water and Ditch Rights

Of course, no matter how much money you can make from the sale of water or ditch rights, taxes will always still be applied. Water rights sales across the country are usually taxed with the following ordinances:

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

As we mentioned above, capital gains taxes can be eliminated from the sale of water rights, ditch rights, or water and ditch rights by using a 1031 exchange. Property owners should also keep track of potential deductions throughout the process of the sale.

Combining these two methods is the best way to get the most out of your investment portfolio.

Selling Water and Ditch Rights with a 1031 Exchange

Once you’ve found the highest paying bidder and sold your water and ditch rights, then you can start celebrating. After the party, it’s time to get to work, as there is a lot of paperwork and a few reasonably tight deadlines for utilizing a 1031 exchange.

Water and Ditch Rights Like Kind Properties

The first step in using a 1031 exchange is identifying like kind properties that you will “exchange” for the sale of your water rights for. Water and ditch rights are considered to be ordinary property rights and therefore can be exchanged for many different like kind properties.

This includes:

  • Mineral Rights and Royalties
  • Mineral Interests
  • Farms
  • Property
  • Businesses
  • Buildings
  • And more

Water and Ditch Rights 1031 Exchange Timelines

Unless you have been eyeing up like kind properties for months, then you will need to begin looking for new assets as soon as you sell your water and ditch rights. The IRS allows for 45 days for the first like kind property to be identified.

That’s only a month and a half! Thankfully you are able to identify up to 3 properties, regardless of total value in the first 180 day period. At the end of this period, one property must be purchased by the same taxpayer in order to qualify for a 1031 exchange on the sale of water and ditch rights.

1031 Exchange Intermediaries for Selling Water and Ditch Rights

Clearly, timelines are tight and water and ditch rights can be highly valued transactions. For these reasons, it is always best to seek professional help when selling water and ditch rights as well as using a 1031 exchange.

In many ways, mineral rights are a great property which can be reinvested to create potentially large income streams.

Why Purchase Mineral Rights and Royalties?

Mineral rights refer to the ownership of the subsurface of a property, usually associated with the excavation of valuable resources. Mineral rights lead to mineral royalties, which are monthly payments derived from a fixed percentage of the sale of oil or gas.

How to Maximize Your 1031 Exchange with Mineral Rights

Using a 1031 exchange to purchase mineral rights is a potentially great idea, but can only be maximized if the right property is identified. After selling your water island ditch rights, it is recommended to speak to a mineral rights expert in order to identify the most valuable mineral rights or royalty properties available.

Conclusion

In conclusion, 1031 exchanges are one of the best ways to reinvest your income from the sale of large properties such as water and ditch rights. By avoiding capital gains taxes, you can purchase equal or greater valued mineral rights in order to develop a steady income stream from the sale of valuable resources.

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