Oil & Gas Royalties Can Diversify your
1031 Exchange

By: Mark T. Mersman, Unity Resources LLC

So often we come across folks that are unaware oil royalties or gas royalties qualify for like – kind exchanges.  Indeed, they’ve been utilized for years, contributing to a well diversified investment portfolio of stocks, bonds, cash and traditional real estate while also helping to defer taxes through a 1031 exchange.

Here are just a few examples of the guidance provided by the IRS for utilizing oil & gas minerals and royalties as replacement property:

Private Letter Ruling 8135048
The exchange of overriding royalty interests for an apartment building, office building and 50% interest in a condominium is of like-kind.

Revenue Rule 55-526
IRS held that a royalty interest in oil and gas in place constitutes real property for federal income tax purposes.

Revenue Rule 73-248
IRS held that a royalty interest is an interest in real property for federal tax purposes.

We’re helping with a 1031 exchange right now for a gentleman who is in retirement and looking for both growth and income from his exchange dollars. While he’s selling a Mobile Home Park he’s able to exchange in to a couple of different properties including a multi-tenant property and Oil & Gas Royalties.

Our client is interested in oil & gas royalties because of the diversification and potential for monthly income and growth. He’s also savvy enough to be interested in taking advantage of the rapidly developing shale oil & gas plays that are presenting so much opportunity today.

We’re helping him to identify opportunities in the Haynesville Shale area, located in North Western Louisiana where there hves been over a million acres leased by the biggest and the best operators and there continues to be a tremendous amount of Natural Gas drilling.

Quietly, almost overnight, the U.S. has seen an oil & gas “LAND GRAB” unlike any in the history of domestic oil & gas production. Over the last three years, BILLIONS of dollars have been invested in shale oil & gas leases by all of the major operators such as ExxonMobil ($40 billion acquisition of XTO), Shell and many others. Even China, Spain and many other foreign national companies have invested literally billions of dollars into our U.S. shale plays within the last 12 months.

What are known as “blanket” shale formations have for years been known to hold significant quantities of hydrocarbons but production from these zones has been dormant due to the lack of ability to make them economically productive. This recent, “land grab”, buying up or leasing the areas containing blanket shale, is being driven by advances in drilling technology known as hydraulic fracturing. That, coupled with advanced horizontal drilling technologies has made millions of acres of minerals, containing trillions of cubic feet of Natural Gas and millions of barrels of oil, economically attractive. If you follow the money trail, huge amounts of money are being invested by major oil and gas companies and in our opinion, bodes well for the future of domestic energy production and the benefits of owning the minerals.

Our client also believes as we do, that exposure to a hard asset, outside of his gold, can help him to protect his portfolio against inflation or dollar devaluation.  And, unlike traditional real estate, owning royalties provides passive income with little to no operational risk or additional capital expenditures.

Do more with your exchange than just defer the taxes. Benefit your portfolio by increasing its level of diversification and passively take advantage of the domestic oil & gas shale boom by owning the minerals.

Guest author, Mark T. Mersmanis Managing Director with Unity Resources LLC in Plano, Texas.  He can be reached at 972.378.0261 for questions or for more information.