Are There Advantages of a 1031 Exchange for Mineral Rights?

When we refer to a 1031 exchange, the “1031” is simply the section the IRS uses in their code – the exchange of real property. This type of transaction is enticing to people who are heavily involved in mineral rights investing because it allows them to defer their capital gains taxes when they sell their oil and gas minerals. The process of doing this exchange can be complicated and requires the expertise of tax professionals, lawyers and more to ensure the transaction meets all the requirements and goes through smoothly. However, for as long of a process it can be, investors can reap significant tax benefits as well. Here’s what you need to know about a 1031 exchange for mineral rights.

Tax Benefits

Millions of dollars in property changes ownership every year across the country. The 1031 exchange has increased in popularity significantly over the years because of the tax benefits investors can take advantage of. The first benefit involves the ability to postpone having to pay taxes on their qualifying properties. With this postponement of paying taxes, investors can continue diversifying their investment portfolio without having to worry about significant capital gains taxes resulting from the sale. And when capital gains taxes don’t have to be paid on the sale of oil and gas minerals, those savings can be used to make other investments.

How To Qualify For A 1031 Exchange

The one thing to remember about mineral rights investing and doing a 1031 exchange is the exchange must be for a similar type of property. So if your capital gains are from oil and gas minerals, then the exchange must be made for oil and gas minerals or something very similar. The exchange must also be of equal or greater value than the oil and gas minerals you sold. Otherwise, you will have to pay capital gains taxes on the price difference between the two transactions.

The Process of Conducting A 1031 Exchange

The IRS has strict rules when it comes to 1031 exchanges, especially regarding timing. You only have 45 days after you sell your oil and gas minerals to identify another similar investment. Then you only have another 180 days to complete the purchase of the investment. In other words, before you sell your property, it’s best to have already begun the process of buying your next property. There are numerous documents and paperwork that have to be filled out to initiate and finalize a 1031 exchange, so working with tax professionals, financial advisors and lawyers to iron out the transaction is essential.

Eckard Land & Acquisition is often asked the question, “how are mineral rights taxed?” It’s a valid question for anyone involved in mineral rights investing, but it’s not a simple one to answer. Many tax laws are governing this type of investment, so the answer often depends on your unique situation. We have the experts to answer those questions for you and more, so contact us at any time to learn how we can help.

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