Can Oil, Gas & Mineral Rights Be Part of a 1031 Exchange?

While most 1031 exchanges involve real property, there are occasions when investors inquire about more esoteric property rights, like rights to natural resources. The answer to whether these type of rights qualify under section 1031 is both straightforward and complex.

It starts by determining how one’s contractual rights are classified. A working interest is considered a real property interest, but a royalty interest is not. The distinction has to do with the investor’s rights and obligations to the property’s access.

A working interest provides an exclusive right to enter land to obtain and develop the natural resource. It also includes the obligation to pay for the expenses related to obtaining the resource and covering operating expenses.

A royalty interest, on the other hand, entitles the investor only to a percentage share of the production results. The investor is under no obligation to cover development or operating expenses.

If one’s interest is deemed a working interest, then it should qualify for a 1031 exchange. It is worthy to note that an investor is not limited in exchanging working rights for other working rights. Given the expansive definition of “like-kind,” in some circumstances the rights can be exchanged for something else. Of course, this is dependent on the nature and use of the “something else,” and discussion with your professional exchange advisors is a must before executing these type of exchanges.

To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.