Take a Tour to 1031 Exchange of Mineral Rights

Over the last 10 – 15 years, gas and oil have been playing a prominent role in 1031 exchanges. The concept is though a new one for the real estate investors, but the minerals were there for a decade or more.

There were misconceptions that the real estate investments revolve around the land and property only, the mineral right was not in use so much for the 1031 exchanges. As the royalties are under the ground and not palpable like the real property, it was assumed by many investors that mineral rights do not pass the 1031 exchange options; mineral rights are not ‘like-kind’ property eligible for the exchange.

Over the past four decades, the courts have confirmed that oil and gas royalties qualify the ‘like-kind’ property exchange like the other properties do. It is further established by the Revenue Ruling and Private Letter Ruling.

The real estate investments allow people to collect revenue either monthly or yearly. The tax benefits are also there with the real estate investments. The self-employment taxes do not include the cash flow received from the rental properties. The individuals are rewarded by the government for their investment in the real estate properties and also their taxes can be deferred through mineral rights 1031 exchange.

In the year of 1954, the IRS looked at the oil and gas property and declared mineral rights to be eligible for the 1031 exchange as ‘like-kind’ property. Through this, the investors can exchange the property and defer their taxes. The exchange should be between the similar properties or royalties. In the year of 1968, the clarification was published by the IRS titled as Revenue Ruling 68-331. It clearly stated that the investors can enter into an exchange from a real estate property. In this case, they will receive royalties instead of rennet revenue for the land.

There are several rules to quality the 1031 exchange for mineral rights. The tax amount can be deferred if the property the investor sells is equivalent to the property he or she is purchasing. The net worth of the property should either be greater or same with the sold one. The investors get 45 days after the sale to find out such property for the exchange and 180 days in total to purchase the same.

There are two types of properties that IRS recognizes: Personal property and real property. It is also allowed to exchange mineral rights through 1031 with real estate property. Though, there are some properties those are excluded from the like-kind exchange. This list includes bonds, stocks, certificates of the trusts etc.

For more information on 1031 exchange and the right guidance on the process, you can contact us, Ten31 Minerals. The professional and experienced people will revise your situation and provide you with a proper guideline to proceed further.