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1031 Energy: How do oil and gas properties qualify for a 1031 exchange? Learn about mineral rights

Mineral Exchange
An exchange of your working or royalty interest for another working or royalty interest qualifies for a 1031 Exchange. You can also exchange a royalty interest for other real estate. For example, if you sell a royalty interest or working interest you could replace it with another royalty interest, working interest, or fee ownership in an office building, apartment building, etc.

However, if you sell a working interest and retain the royalty interests or surface rights, the IRS may disallow your exchange. Production payments do not qualify for a 1031 Exchange.

The sale of working interests often involves the sale of related equipment. While the IRS allows you to transfer a minimal amount of equipment tax free, transfers of substantial equipment (usually exceeding 15% of the sale price) require the equipment to be treated as a separate personal property exchange. Personal property exchange rules can vary. Please contact us for specifics.



1031 Energy.com, a Petro Sun Company, offers their Clients the opportunity to reinvest their capital directly and own record title in oil and gas producing properties.

Oil and Gas Intangible Drilling Costs:

The Intangible Drilling Costs (IDC) you declared must be recaptured to the extent that you do not acquire qualified natural resource property. In other words, if you sell a working interest and buy an office building, you would have to "recapture" the Intangible Drilling Costs (IDC) costs you had deducted.

Oil and gas beneath the surface is considered a part of the realty, but when removed it becomes personalty. You can exchange a working or royalty interest for another working or royalty interest or even a ranch, hotel or office building. A transfer of a working interest while retaining a royalty interest or surface rights is usually treated as a lease rather than a disposition and will not qualify for a tax-free exchange. If a production payment were retained, the transaction would probably qualify for tax-free treatment. Equipment, furniture and other personal property can only be exchanged tax-free for very similar types of equipment or furniture. Most transfers of working interests involve some degree of both equipment (usually 5-10%) and real estate. For example, if you sold, in a tax-free exchange, a mineral interest for say $900,000 and related equipment for $100,000, in order to be tax-free you would need to receive a mineral interest with a value of $900,000 or greater and well equipment with a value of $100,000 or more. Also, to be tax-free in this example, you must not receive any thing that is not like-kind property such as cash, notes of indebtedness, or net relief of indebtedness. IDC recapture under IRC 1254, in an exchange, is limited to recognized gain plus the fair market value of replacement property that is not a natural resource recovery property.* * U.S. Treasury Reg. Sec. 1.1254-2(d)

Contact us at 1031x.com so our consultants can explain the complexities of the oil and gas exchange.


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