IRS Section 1031 classifies an investment in an oil and gas “Royalty Interest” as like-kind property for a 1031 Exchange.
Investors can diversify their portfolios by exchanging an apartment complex, raw land, an office building, or any other eligible investment property for an interest in oil or gas royalty production.
The term, “Royalties” is often used interchangeably and refers to:
- Mineral Interests
- Royalty Interest
Both interests involve ownership of minerals under the ground and both entitle their owner to receive a share of the mineral production of the property and to a portion of the revenue from this production.
An investor who owns Royalty Interests owns the mineral rights but has no rights or obligations in the operation of the property.
Usually, he/she does not bear any of the exploration or development costs. A Royalty Interest investor is entitled to a share of the mineral production or a share of the proceeds produced by the property. Royalty Interest should not be confused with Working Interest which bears the expense of operating the oil and gas wells on the land and receives a portion of the proceeds of the gas and oil produced.
The mechanics of completing an Oil & Gas Royalty 1031 Exchange are the same as when doing an Exchange in traditional real estate. Just as with a Tenant in Common (TIC) investment, it is important for commercial real estate investors to work with experienced sponsors. A good investment depends upon thorough engineering and an understanding of the productive life of wells. Complete analysis of this type of investment is necessary and a Qualified Intermediary who is skilled in this field should be engaged. The 45 Day and 180 Day time frame must be followed as for any other 1031 Exchange.
The amount of Royalty Interests purchased can be flexible as long as your minimum investment is sufficient to meet the 1031 requirements. A purchase of Royalty Interests may also be combined with that of traditional real estate as long as it meets the IRC requirements.
NOTE: There are risks associated with Oil & Gas Royalty – 1031 Exchanges which should be reviewed and are outlined in the Private Placement Memorandum (PPM).
Securities offered through Pacific West Securities, Inc. Member FINRA/SIPC
This material is neither an offer to sell nor the solicitation to purchase any security. The information is for discussion and information purposes only. It is not intended to replace competent legal, tax or financial planning advice. The applicable tax codes apply to and relate to federal law only. Individual states may have their own additional tax codes Please contact the appropriate tax and legal professional in your state. This information is provided from sources believed to be reliable but should be used in conjunction with professional advice that is consistent with your personal situation.
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