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Tax reference

1031 Exchange and Mineral Rights: What Qualifies

A 1031 exchange of mineral rights defers tax on selling a mineral or royalty interest when the money buys other U.S. real property of like kind. This reference gives, for each kind of mineral interest, whether it qualifies, why, and the statute, regulation or court decision behind it.

  • Release 2026.10.1
  • Sources read October 5, 2026
  • Not tax advice
  • CC BY 4.0

Most mineral and royalty interests that last forever can be exchanged under section 1031 for other U.S. real property, and the reverse works too. Since 2018 the exchange rule covers real property only7, and the regulation counts minerals still in the ground as real property4. A federal appeals court held in 1941 that mineral rights are like kind to a city lot, because the rule does not distinguish between kinds of real estate10, 8. What fails: a production payment11, units of an LLC, partnership or royalty trust, and stock5. Leases, working interests and term or overriding royalties depend on how long they have left to run8. The replacement property has to be identified within 45 days and received within 1802.

Which mineral interests qualify

The test is whether the interest is real property under section 1031 and whether it is held for investment or for use in a business, on both sides of the exchange1. State law also counts: property that is real property under the law of the state where it lies is real property for section 10316, so the same kind of interest can be treated differently in two states.

1031 exchange mineral rights: which interests are like kind to other U.S. real property, marked yes, depends or no
Which mineral interests qualify. Yes, depends or no, from the statute, the regulations and two court decisions; the table gives the reason and the source for each row.
InterestLike kind to U.S. real propertyWhy
Fee mineral interest, perpetualYesMinerals in the ground are an unsevered natural deposit, which the regulation treats as real property; a court held mineral rights like kind to a city lot.4, 10
Perpetual royalty or nonparticipating royaltyYesAn interest in real property where the law of the state where the minerals lie treats it as one; that state classification controls under the regulation.6, 5
Oil and gas lease or working interestDepends on the factsA leasehold is listed as real property. The regulation’s own example of a like kind exchange is a leasehold with 30 years or more to run, so the time left on the lease matters.5, 8
Overriding royaltyDepends on the factsCarved from a lease and ends when the lease ends, so the same question of time left applies, along with how state law classifies it.6, 8
Term royalty or term mineral interestDepends on the factsLasts for a set term rather than forever, so the same question of time left applies.8
Production payment (oil payment)NoThe Supreme Court held an exchange of oil payments for real estate was a transfer of future income, not an exchange of like kind.11
Units of an LLC taxed as a partnership, or of a partnershipNoInterests in a partnership are excluded from real property, unless the partnership elected out of partnership rules under section 761(a).5
Royalty trust unitsNoCertificates of trust or beneficial interests are excluded from real property.5
Shares of a royalty or mineral companyNoStock is excluded from real property.5
Oil, gas or minerals already producedNoMinerals stop being real property once they are severed, extracted or removed.4
Minerals outside the United StatesNoForeign real property is not like kind to U.S. real property.3
Minerals held primarily for saleNoThe exchange rule does not apply to real property held primarily for sale, as by a dealer.1

It works in both directions

Like kind refers to the nature of the property, not its grade or quality, and whether real estate is improved or unimproved does not matter8. In Crichton, a mother transferred to her three children a share of the oil, gas and minerals under country land in exchange for their share of an improved city lot, and the court held the exchange tax free10.

So an owner can sell a royalty and buy a rental house, a farm or a commercial building, and an investor can sell a building and buy mineral or royalty interests. The interest bought has to be one the table above treats as real property, held for investment.

Deadlines, the intermediary and cash left over

The replacement property must be identified in writing within 45 days after the minerals are transferred, and received within 180 days or by the due date of that year’s return, including extensions, if that comes first2. Up to three properties can be identified whatever their value, or more if their total value stays within 200 percent of what was sold9.

The seller must not receive the sale money. A qualified intermediary holds it under an agreement that limits the seller’s right to receive, pledge or borrow it, which is the regulation’s safe harbor9. Cash or other property kept out of the exchange is taxed, up to the amount of the gain1. The exchange is reported to the IRS on Form 882412.

When the replacement is a commercial building

A building is depreciated, and the regulation says the depreciation recapture rules of sections 1245 and 1250 still apply to it, whatever section 1031 calls it4. The tax on a later sale of the building also follows the state it sits in, which may not be the state where the minerals were. States differ widely here: AMR’s state tax reference shows which of the 50 states and D.C. levy a broad personal income tax.

For a building in Massachusetts or New Hampshire, two neighboring states that tax a gain on sale very differently, MANSARD Commercial Properties publishes a guide to 1031 exchanges for commercial real estate in both states, covering the deadlines, the qualified intermediary and each state’s rules for commercial property.

What this page does not settle

How the time left on a lease that is held by production is measured for the 30 year example is a question of facts and practice; this page does not answer it. How each state classifies overriding royalties and term interests was not reviewed state by state for this release. Whether a state follows the federal deferral when its own income tax applies to the gain was not reviewed either. A tax adviser who handles exchanges should confirm each of these before a sale.

Common questions

Can I do a 1031 exchange with mineral rights?

Usually, yes, when the mineral interest is perpetual, is real property under the law of the state where it lies, and is held for investment. The replacement must also be U.S. real property held for investment or business use.

Can I sell a rental property and buy mineral rights in a 1031 exchange?

Yes. Like kind does not depend on the type of real estate, so a perpetual mineral or royalty interest can be the replacement for a rental house or a commercial building.

Do oil and gas royalty interests qualify for a 1031 exchange?

A perpetual royalty generally does, where state law treats it as real property. An overriding royalty or a term royalty ends at some point, so how long it has left to run matters.

Can I 1031 exchange a working interest?

A working interest is held through an oil and gas lease, which the regulation lists as real property. The regulation’s example of a like kind leasehold has 30 years or more to run, so the remaining term decides it.

Do I need a qualified intermediary?

In practice, yes. If the seller receives the sale money, the exchange fails; the usual safe harbor in the regulation is a qualified intermediary who holds it until the replacement is bought.

Sources

Each source was read on October 5, 2026. The operative words are quoted exactly as read.

  1. 26 U.S.C. 1031(a)(1)26 U.S.C. 1031. Read October 5, 2026.
    “No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.”
  2. 26 U.S.C. 1031(a)(3)26 U.S.C. 1031. Read October 5, 2026.
    “such property is not identified as property to be received in the exchange on or before the day which is 45 days after the date on which the taxpayer transfers the property relinquished”
  3. 26 U.S.C. 1031(h)26 U.S.C. 1031. Read October 5, 2026.
    “Real property located in the United States and real property located outside the United States are not property of a like kind.”
  4. Treas. Reg. 1.1031(a)-3(a)(3)Treas. Reg. 1.1031(a)-3. Read October 5, 2026.
    “Unsevered natural products of land, including growing crops, plants, and timber; mines; wells; and other natural deposits, generally are treated as real property for purposes of this section. Natural products and deposits, such as crops, timber, water, ores, and minerals, cease to be real property when they are severed, extracted, or removed from the land.”
  5. Treas. Reg. 1.1031(a)-3(a)(5)(i)Treas. Reg. 1.1031(a)-3. Read October 5, 2026.
    “Intangible assets that are real property for purposes of section 1031 and this section include the following items: Fee ownership; co-ownership; a leasehold; an option to acquire real property; an easement”
  6. Treas. Reg. 1.1031(a)-3(a)(6)Treas. Reg. 1.1031(a)-3. Read October 5, 2026.
    “property is real property within the meaning of paragraph (a)(1) of this section under State or local law if, on the date it is transferred in an exchange, the property is real property under the law of the State or local jurisdiction in which that property is located.”
  7. Treas. Reg. 1.1031(a)-1(a)(3)Treas. Reg. 1.1031(a)-1. Read October 5, 2026.
    “for exchanges beginning after December 31, 2017, section 1031 [...] apply only to qualifying exchanges of real property”
  8. Treas. Reg. 1.1031(a)-1(b) and (c)(2)Treas. Reg. 1.1031(a)-1. Read October 5, 2026.
    “The fact that any real estate involved is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class. [...] exchanges a leasehold of a fee with 30 years or more to run for real estate”
  9. Treas. Reg. 1.1031(k)-1(c)(4)(i)Treas. Reg. 1.1031(k)-1. Read October 5, 2026.
    “Three properties without regard to the fair market values of the properties (the “3-property rule”), or (B) Any number of properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200 percent”
  10. 122 F.2d 181Commissioner v. Crichton, 122 F.2d 181 (5th Cir. 1941), via the Caselaw Access Project. Read October 5, 2026.
    “It was not intended to draw any distinction between parcels of real property however dissimilar they may be in location, in attributes and in capacities for profitable use.”
  11. 356 U.S. 260, 268Commissioner v. P. G. Lake, Inc., 356 U.S. 260 (1958). Read October 5, 2026.
    “The exchange cannot satisfy that test where the effect under the tax laws is a transfer of future income from oil leases for real estate.”
  12. About Form 8824Internal Revenue Service, About Form 8824. Read October 5, 2026.
    “Use Parts I, II, and III of Form 8824 to report each exchange of business or investment property for property of a like kind.”

Cite this page

American Mineral Registry. "1031 Exchange and Mineral Rights: What Qualifies." Release 2026.10.1, October 6, 2026. https://americanmineralregistry.com/research/1031-exchange-mineral-rights