Defer Capital Gains When Selling Mineral Rights
Sell mineral rights and defer taxes by exchanging into other real property. Understand how 1031 exchanges work for mineral owners.
Yes—mineral rights are real property that can be exchanged tax-deferred under IRC Section 1031.
A 1031 exchange (also called a "like-kind exchange") allows you to sell an investment property and defer capital gains taxes by reinvesting the proceeds into another like-kind property. Since mineral rights are classified as real property, they qualify.
This means you can sell your mineral rights and exchange them for other mineral rights, royalty interests, rental properties, or other real estate investments—without paying capital gains taxes at the time of sale.
Mineral Sale: $200,000
Cost Basis: $20,000
Gain: $180,000
Tax (20%): $36,000
With 1031: $0 tax now (deferred)
Before closing your mineral sale, you must engage a Qualified Intermediary (QI). The QI holds the sale proceeds—you cannot touch the money yourself, or the exchange is disqualified.
Close the sale of your mineral rights. Proceeds go directly to the QI, not to you. This starts the clock on your exchange deadlines.
Within 45 days of closing, you must identify potential replacement properties in writing. You can identify up to three properties regardless of value, or more under certain rules.
Within 180 days of your original sale, you must close on the replacement property. The QI releases funds directly to the closing.
Critical: The 45-day and 180-day deadlines are strict. There are no extensions, even for weekends or holidays. Missing either deadline disqualifies the entire exchange.
Under "like-kind" rules, real property can be exchanged for other real property. This gives mineral owners many options:
Mineral rights in different basins
Royalty interests
Overriding royalty interests
Working interests (with caution)
Rental properties
Commercial real estate
Raw land
Delaware Statutory Trusts (DSTs)
Many mineral owners exchange into rental real estate. This converts a depleting asset (minerals) into an appreciating asset (real estate) while maintaining cash flow through rental income—all tax-deferred.
Equal or greater value: Replacement property must be worth at least as much as what you sold
Reinvest all equity: All proceeds must go into replacement property
Equal or greater debt: Take on at least as much debt (or use cash)
Investment purpose: Both properties must be held for investment
Primary residence (not investment)
Property held for resale (flip)
Foreign real estate
Personal property (equipment, vehicles)
You don't have to exchange 100% of your proceeds. Partial exchanges are allowed, but you'll pay taxes on any cash you receive (called "boot").
Mineral Sale: $200,000
Replacement Property: $150,000
Cash Out (Boot): $50,000
Result: Tax on $50,000 gain, remainder deferred
If you need some cash, a partial exchange lets you take money out while still deferring taxes on the portion you reinvest.
The 45-day identification period is short. You need to have replacement properties in mind before closing your mineral sale, or risk running out of time.
Purchasing mineral rights quickly can be difficult. Many mineral owners exchange into conventional real estate because it's easier to find and close on time.
QI fees, legal costs, and closing costs on replacement property add up. Make sure the tax savings exceed these costs.
1031 exchanges have strict rules. A mistake can disqualify the exchange and create a tax bill. Professional guidance is essential.
Yes. Both mineral rights and royalty interests are considered real property for 1031 purposes. You can exchange mineral rights for royalty interests and vice versa. Working interests are more complex—consult a tax professional.
No. The replacement property must be newly acquired. You cannot use 1031 proceeds to pay down debt on property you already own or to reimburse yourself for a previous purchase.
A DST is a passive real estate investment that qualifies for 1031 exchanges. It's popular with mineral owners because you can invest exact amounts (no need to find perfectly-priced property), there's no landlord responsibilities, and DSTs have already been vetted. The tradeoff is less control over the investment.
Taxes are deferred, not eliminated. You'll owe taxes when you eventually sell the replacement property for cash. However, you can do another 1031 exchange at that point, continuing the deferral. If you hold until death, your heirs receive a stepped-up basis and the deferred gains may never be taxed.
Get a free valuation to understand your options
Whether you're planning a 1031 exchange or a standard sale, understanding your property's value is the first step. Buckhead Energy provides free, no-obligation valuations.
Disclaimer: This information is provided for educational purposes only and does not constitute financial, legal, or tax advice. 1031 exchange rules are complex and subject to change. Consult with a qualified tax professional and attorney before proceeding with a 1031 exchange.