Understanding Royalty Taxes – Part 3 1031 Exchange for Mineral Rights!
May 8, 2019
A key factor that anyone selling mineral rights must understand is the capital gains tax that applies whenever certain property is sold.
Capital gains taxes can be significant depending on your income bracket and how much you earn from your mineral rights for sale.
If you plan on reinvesting your money into more property, you can sell your mineral rights and then defer this tax by filing for a 1031 Exchange form.
What is the 1031 Exchange for Selling Mineral Rights?
The 1031 Exchange is an IRS deferment program that allows buyers and sellers of certain property, including mineral rights for sale, to defer the capital gains tax that applies to the income made through these sales.
It allows anyone selling mineral rights to roll that income over into another purchase of “like-kind” property without having to pay the capital gains tax.
To initiate the 1031 Exchange, you must include the form with your tax return and follow a strict set of rules on how your funds are exchanged and the type of property you buy.
What Are the Rules When Filing A 1031 Exchange?
The 1031 Exchange capital gains tax deferment has two basic rules that must be followed if you wish to avoid paying capital gains tax on money you make when you sell your mineral rights:
1. Use the money to purchase more “like-kind” property.
2. Follow the 45/180 rule which states that you must make your new property purchase within 45 days of selling your mineral rights and complete the transaction or close on your new property within 180 days of the sale.
What Properties Qualify for A 1031 Exchange Deferment?
If you sell your mineral rights and plan on filing for a 1031 Exchange deferment, it’s essential you reinvest the income made on your sale by purchasing more “like-kind” property.
According to the IRS, a qualifying “like-kind” property purchase is either investing in more mineral rights for sale or buying real estate.
If you choose to use your income for anything else, you are subject to paying the capital gains tax.
Work With A Royalties Specialist
While filing a 1031 Exchange when selling mineral rights is fairly straightforward as long as all qualifications are met, it can become more complicated if you do not use all income gained when you sell your mineral rights, involve the sale of property like oil production equipment, or involve other special circumstances.
In these cases, it is highly recommended that you work with either a CPA or tax agent familiar with the 1031 Exchange and its application or with a royalties expert who can advise you on the tax issues involved when you decide to offer mineral rights for sale.
If you want continue learning about Royalties taxes and in particular the gas severance tax, be sure to read Understanding Royalty Taxes - Part 4 Gas Severance next - and if you missed Part 1 Oil Severance or Part 2 Depletion Allowance of this practical series on taxation for mineral interest owners, click on those links as well!
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