Owning property is one of the best ways to increase your equity and net worth. As some people know, mineral rights can be one of the most valuable assets in your portfolio. For those selling mineral rights, here’s how to set up a 1031 exchange to maximize your investment.
What is a 1031 Exchange?
A 1031 exchange gets its name as it is written in section 1031 of the IRS code. For those who haven’t had the pleasure of reading the code, it defines a 1031 exchange as the ability to defer capital gains tax on the sale of a property when another “like-kind property” is purchased.
Like-Kind Properties for Mineral Rights Sales
So basically, if you sell your mineral rights, you will not have to pay capital gains tax so long as you reinvest in something similar of equal or greater value. In the eyes of the IRS, “like-kind” properties eligible for a 1031 exchange after the sale of mineral rights include:
- Land & Property
- Mineral & Water Rights
- And More.
Qualifications to Use a 1031 Exchange with Mineral Rights
In order to know how to set up a 1031 exchange with mineral rights, there are a few other important aspects of your transactions that must be accurate. Most commonly:
● The new property must be under the same taxpayer name as the mineral rights.
● After 45 days, the property owner must identify up to 3 potentially like-kind properties, or more than 4 if the total property values do not exceed 200% of the mineral right sale
● The new property must be purchased in <180 days after the sale of the mineral rights.
Ultimately, using a 1031 exchange can help you get the most benefit from selling your mineral rights. Instead of paying a hefty capital gains tax on the sale of your property’s subsurface, you can reinvest into something new. As you’ve learned from your recent sale, mineral rights can be extremely valuable, so perhaps you will reinvest even more into oil and gas production.