When Exchangers call our 1031 CORP. Exchange Team they often ask us what assets qualify as like-kind replacement property in a tax-deferred exchange. Rental units, office buildings, duplexes and warehouses are typically properties that come to mind. This More, More Monday addresses oil, gas and mineral rights, lesser-known assets that are growing in popularity among Exchangers.
The 1968 Revenue Ruling 68-331, and several Revenue Rulings thereafter, established that real estate ownership interests, whether above or below the ground, met the definition of like-kind of a 1031 exchange. Mineral, gas and oil interests may be exchangeable for a fee interest in real property depending on the type of interest being conveyed. There are several types of oil, gas and mineral rights, collectively referred to as minerals, including mineral estate, mineral lease and mineral royalty.
A mineral estate is the perpetual interest in all minerals running with the land. A taxpayer can separate the mineral estate from the surface real estate and just exchange the mineral estate into a fee interest in any other type of real estate for 1031 exchange purposes.
A mineral lease gives the lessee the right to extract minerals for a period of time or until exhaustion. The lessee incurs all the costs of exploration and extraction. An exchange of this type of a mineral lease into a real estate interest is allowed under federal regulations.
A mineral royalty entitles the holder to the right to receive a percentage of the mineral produced until exhaustion. This qualifies under federal regulations to be exchanged for real estate, however, a mineral lease in which the lessor retains a royalty interest cannot be exchanged for real estate.
Exchanges involving mineral estates, leases and royalties allow exchangers to diversify their portfolio while maximizing their tax savings. You can also acquire them as replacement property to complete your exchange. The 1031 CORP. Team is glad to answer any questions you may have about mineral, gas and oil interests. As always, we recommend taxpayers seek the advice of their professional advisors to see if these assets meet their short and long term investment objectives. Find out what else you can exchange in the next More, More Monday. If you interested in Gas, Mineral and Oil, follow our 1031 CORP. Shale Facebook page for regular industry updates.
