Buying Mineral Rights Using 1031 Like-Kind Exchange

We find ourselves very near the top of a real estate cycle, and consequently, many investors are selling their real estate investments to capture their profits. If you find yourself in that position, you may find it interesting to know that you can acquire oil and gas mineral interests with the funds received from a real estate sale, and create a non-taxable event known in the IRS tax code as a 1031 Like-Kind Exchange.

To ensure that tax liability is not created upon the sale of the first asset, you can utilize a 1031 Like-Kind Exchange if you meet the following criteria:

  1. The property or asset being sold must be held for investment or use in a trade or business.
  2. The property or asset being purchased with the proceeds must be “like-kind” to the old property.
  3. Sales proceeds must be used to purchase the new property within 180 days of the sale of old property, although the new property must be identified within 45 days of the sale.
  4. The investor cannot be in “constructive receipt” of the money from the sale of the old property. You will need a third party intermediary to hold the funds until you close on the like-kind property.

 

Oil and gas mineral rights are part of land ownership, and as such, qualify as like-kind to other real estate investments. Caple Royalty Services can assist you in finding the right oil and gas minerals for purchase, or in some cases, the right package of oil and gas mineral rights, that will provide the risk/reward and cash flow that fit your strategy.