Three Key Rules for a 1031 Exchange in Properties and Mineral Rights

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While investing in the properties, people can take full advantage of the 1031 exchange and there is a valid reason for it. The tax for real estate profits is pretty high in the U.S. To defer the tax, people take the help of 1031 exchange. This is a legal trick to not paying a lump sum in tax. Suppose, a property is worth $1,000,000 and has been sold in $1,750,000. The net profit is $750,000. This gain will be taxable. To defer the tax in this case, you can purchase another property worth $1,750,000. This will relieve you from paying tax for the gain. This is called 1031 Exchange or like-kind property exchange. Not only is this available for land sales, 1031 exchange is available for mineral rights also.

As an investor, you must find this a brilliant idea to invest, grow your wealth and save on the tax payment. But, you need to abide by some rules to use the 1031 exchange for mineral rights properly. Otherwise, you may have to face some severe legal consequences. You can consult 1031 exchange companies for the right advice to carry on the process.

Focus on the Term ‘Like-kind’

To stay compliant with the IRS rules, you have the eligibility to exchange a property that is of same kind or value. If you are selling your property, you are only able to buy another property. You cannot switch while making this exchange. For example, in order to buy stocks, you can’t sell your existing property. It won’t fall under the 1031 exchange options.

An Intermediary is a Must


According to the IRS rules, the 1031 exchange of mineral rights needs to be conducted by an intermediary who has enough experience and skill. This person or company will also handle the paper transaction. The investor is not allowed to deal with the funds. The selling of the property and applying for a new like-kind one will be controlled by the intermediary. The intermediary is the one who processes the final transaction.

1031 exchange companies recommend choosing the intermediary wisely as you are going to trust him or her with a large sum of money. If the company becomes bankrupt while in the middle of your exchange, you will still not be allowed to control the funds.

Watch the Deadline


After the sale, you will have 45 days to give a list of three potential properties you want to buy. The value of the property either has to be the same or greater than the sold one. Once the sale is closed, you will be provided 135 days altogether to get a new one. There is one other option you can take which is purchasing the new property beforehand; prior to the sale. In that case, the price of the sold property will be refunded to your account.

Contact Ten31 Minerals to deal with your exchange properties. They will ensure you stay compliant with all IRS rules and regulation and that you get the most out of your tax deferment.