1031 Exchanges for Mineral Rights: Does It Work?

Can a Section 1031 tax exchange be used for mineral rights? Contrary to commonly
held beliefs, yes— it can be used to exchange mineral rights in most cases. There are,
however, a few things you should be aware of, especially time limits and the types of
limitations that may render a mineral rights lease ineligible for a Section 1031
exchange. Read below to learn about Section 1031 exchanges as they relate to
mineral rights.

What is Section 1031?
Section 1031 is part of the IRS tax code. When real property is sold and a gain is
received from the sale, you normally have to pay taxes on those gains. When using a
1031 exchange, however, investors can defer capital gains taxes by “exchanging” the
property being sold for a like-kind asset of equal value, meaning that the proceeds
are reinvested into similar assets.

The benefit of doing a Section 1031 exchange is that tax deferral. This allows you to
change your investment vehicle without cashing out or creating a situation in which
the IRS would require you to pay capital gains taxes.

1031 Exchanges for Mineral Rights
Broadly, the definition for 1031 exchanges covers things like real estate investments:
raw land, homes, hotels, multifamily dwellings, commercial properties, retail
properties, farmland, oil fields, and so on. This leads some to believe that 1031
exchanges cannot be used for mineral rights—but the 1031 exchange actually can be
used for mineral rights.

Technically, leases on mineral rights are considered a real estate interest, which
makes mineral rights eligible for the 1031 exchange. However, certain terms of a
mineral lease might render it ineligible. In general, limitations on the amount of
minerals allowed to be extracted through the mineral lease may affect whether
mineral rights are eligible for a 1031 exchange.

Nuances to Know
To successfully complete a 1031 exchange, there are a few nuances to be aware of.
These exchanges are classified as “like-kind,” a phrase that can be misleading. In this
instance, “like-kind” doesn’t necessarily mean that you must trade your investment
for an exactly similar investment, like exchanging between land investments. Rather,
this term applies to investment and business property, which means you can
exchange rental property for retail property or exchange undeveloped land for a
commercial building.

Another thing to understand about Section 1031 exchanges is that you can do them
as many times as you like—but all gains that you make during the exchange must
be rolled over into the new investment. In this way, your profits remain untaxed until
you sell the investment for cash, at which point you’ll need to pay the one-time long-
term capital gains tax.

The Bottom Line for Your Money
Mineral rights are a great investment tool. If you’re interested in selling real estate so
that you can invest some of your real estate portfolio in mineral rights, the 1031
exchange is an instrument to help you reinvest that money without paying taxes.
Before you purchase mineral rights, however, it is wise to lay the initial groundwork
for the future by ensuring that your mineral rights will be eligible for the 1031
exchange program. Here at Eckard Enterprises, our experts can use our
considerable expertise to help you navigate this process as smoothly and effectively
as possible.

Ready to learn more about investing in mineral rights? Contact Eckard Enterprises
and we’ll be happy to walk you through your options and answer any questions you
may have.