Various Sectors of Considerable 1031 Exchange Options
1031 Exchange has an impact on the capital gain taxes. The exchange includes gas, oil, water rights as well. The rules and regulations of 1031 are either followed forward or revert as per the tax-deferred exchange.
The Mineral Rights
For the 1031 Exchange, the interest of oil, gas and mineral rights come under the exchange option for the tax deferral. For the Federal tax purpose, the leases are also considered as the real property interest. This makes it eligible for the 1031 tax deferral. The lessee owns the right to remove minerals for a certain time (generally, until the depletion) including the incurred cost for the discovery and removal. The lessee can also deduct the drilling costs including the labor, maintenance, repair, transport, fuel and supplies. Royalties are also incorporated in the real property interest category, hence, it qualifies for the 1031 exchange options. Royalties for oil, gas and mineral neither represent an operating interest nor is responsible for the production costs. On the contrary, the royalty holder gets a certain percentage of interest for the mineral removal and the property itself.
The Water Rights
If you look deep into the 1031 exchange options, you will find out that the water right is also considered in the same. It is variable under the different state laws, but it is a like-kind property to real estate in some states of the United States. If the water right is limited in terms of duration and amount, it will not be considered under the 1031 section. Even though the water right is similar to the real property as per the state law, if the water right is limited with amount and duration, it will not be under the exchange option of 1031 exchange.
The Ditch Rights
In the year of 2008, the Congress approved the Food, Conservation and Energy Act. For holding the stock in a mutual reservoir, ditch or Irrigation Company can be eligible for the 1031 Exchange options. The shares of the company can be exchanged if the irrigation company, ditch or the reservoir is described in Section 501(c) (12) (A) and the court recognizes the same as similar to the real property. Mutual Ditch companies are non-profit organizations those are created to provide the members a joint water distribution. The farmers and the ranchers are the shareholders and they have the exclusive right to use the company’s water according to the proportion of their share.
It is complicated to deal with tax deferral without the help of the experts. Staying compliant with the law and other rules and regulations, using the exchange option is not that easy. For utilizing the 1031 exchange options in the right way, call us, Ten31 Minerals for assistance and support. Our professional team, with adequate knowledge and skill, will help you with the best possible result that you have desired for.