Oil & Gas Investments For 1031 Exchanges
Using Royalties in a 1031 Exchange
A royalty is a percentage of revenue paid to a land owner (aka mineral owners) from the production of oil and gas on his or her property. Investors are not participating in the drilling.
Royalties & mineral rights are considered real property and are deemed to be “like-kind” to traditional real estate, qualifying them to be used in a 1031 exchange. Individuals engaging in a 1031-Exchange can use royalties and minerals as an exchange solution. Subsequently, if they are looking to “exchange out of” minerals/royalties, they are able to purchase any other “like-kind” asset.
How do mineral owners get paid a royalty?
Mineral Owners own interest in the sub-surface real estate—everything from the crust to the core—and are entitled to compensation for everything that is produced from their land.
As energy companies drill wells and produce hydrocarbons, they are required to pay a royalty to the mineral owners. The energy company, known as the operator, pays all drilling and operating expenses and assumes all drilling risks and liabilities.
Mineral Owners receive monthly royalty checks from the companies operating on their properties. This payment is generally 15-25% of the gross revenue produced from the property and is free and clear of any operational costs and drilling risks.
Why explore oil & gas offerings for your 1031 Exchange?
Portfolio Diversification
Royalties & minerals provide an opportunity for investors to step away from traditional real estate and diversify into a different asset class with exposure to different economics.
Investor Independence
Owners of undivided interests in royalty properties are not locked into an ownership structure that links them to other investors in the same property. Each owner is free to exercise control over holding period and exit strategy to suit individual investment objectives.
Transaction Size Flexibility
Private Royalty Ownership is a 1031-Exchange alternative that allows you customize your investment level. Whether you sell your property for $100,000 or $5,000,000 you can exchange the exact proceeds into oil and gas royalties.
Avoid “Cash Boot”
The purchase of minerals & royalties can be used to consume any remaining exchange proceeds that an individual may have from the sale of their relinquished property or properties.
Current Cash Flow
Low distributions based on compressed capitalization rates have left many traditional real estate investors hungry for higher rates of return. Minerals & Royalties have the potential to experience an acceleration in cash flow caused by the drilling of additional wells by oil & gas operators.
Tax-Advantaged Income
Royalty income is allotted a 15% tax depletion allowance, meaning that 15% of the income received is tax sheltered.