Looking At The 1031 Exchange When Selling Mineral Rights!
January 18, 2017
Like selling any other type of property, the sale of gas rights and other mineral rights is subject to the federal property gains tax. Oil and gas are considered to be property, so those selling gas rights must report any income made from a sale. Under the 1031 Exchange deferment program, mineral rights and royalties qualify for capital gains deferment. Those profiting from the sale of mineral rights are able to reinvest the income they make into other similar property.
What Is the 1031 Exchange?
The 1031 Exchange, also known as a like-kind exchange, is a tax deferment that applies to real estate. With a 1031 exchange, the owner of a property does not have to pay capital gains taxes on the income made by selling that property when it is re-invested in a similar property. The process where a person can sell their property and purchase another piece of property with the proceeds applies to both the sale of actual real estate as well as the sale of gas rights and other mineral rights that are also considered as property. When selling gas rights, a seller is not required to pay capital gains taxes as long as they reinvest the income made through the sale in some other type of real property.
Mineral Rights and Royalties Are Real Property
Mineral rights and royalties are considered to be real property according to federal tax law. This qualifies the sale of gas rights and certain other mineral rights for the 1031 Exchange deferment. Based on this qualification, owners must reinvest any income made from the sale of these products, although this reinvestment is not required to be in the form of another mineral lease.
Earnings attained from selling gas rights and mineral royalties can also be reinvested in land, buildings, and anything else considered to be real estate property. As such, those who use their mineral ownership to generate income can use the proceeds to create a more diverse investment portfolio.
Payment Matters with 1031 Exchanges
The main stipulation when selling gas rights and mineral royalties is the way in which payments are collected. To qualify for a 1031, a lessee or mineral owner receiving a royalty must receive monetary payments in exchange for those minerals. Payments made in the form of a portion of the product that is extracted do not qualify.
Time Limitations with 1031 Exchanges
Along with the need to receive monetary payment for any mineral leases or royalties, a second stipulation to qualify for a 1031 Exchange is the 45/180 Rule. This tax rule states that those reinvesting their income into a like property have 45 days from the sale of their property to identify a qualifying reinvestment property and must close on it within 180 days. With regards to mineral rights and royalties, the 45/180 Rule applies based on the date of payment for these products.
Although this is only a very basic overview of the 1031 Exchange tax law, it illustrates how the deferment can apply to those selling gas rights as well as other minerals and the financial advantages it can offer. To learn more about the sale of gas rights and qualifying 1031 transactions, investors should discuss their interests with an experienced royalties company. When properly planned, investments in gas and oil can become a profitable venture and serve as a good starting point to grow a more diverse investment portfolio. Utilizing the 1031 Exchange method of deferring capital gains taxes can help investors grow their investments even faster!
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