& THE “LIKE-KIND” 1031 EXCHANGE
Investors have been enjoying the benefits of private royalty ownership and “like-kind” 1031 exchanges for over 60 years.
Oil and gas royalties investment began in the 1900’s. Owners of royalty assets receive monthly “mailbox money” from oil and gas companies who drill and operate wells on their property.
Oil and gas royalty assets qualify as a “like-kind” replacement for all forms of investment real estate. Private royalty ownership is an income-generating property investment that offers cash flow and portfolio diversification.
Unlike oil and gas drilling investments, royalty owners do not invest in capital equipment or field operations. Royalty interest holders do NOT get billed for exploration, drilling or operating wells, nor do they hare in any of the risks or liabilities associated with that side of the industry. Instead, royalty owners simply receive a share of each well’s revenue generated from monthly oil and gas production.
In 1968, the IRS published the Revenue Ruling 68-331 clarifying Section 1031 of the 1954 Act. The ruling established that real estate ownership interests, whether above or below the ground, met the definition of “like kind” for an exchange.
Over the past four decades, court rulings have re-affirmed that oil and gas royalty interests qualify as “like-kind” to all other forms of real property. In addition, several Revenue Rulings and Private Letter Rulings have further established the like-kind nature of royalties when exchanging out of traditional real estate. Investors have been able to take advantage of the 1031 tax deferral by exchanging between brick-and-mortar real estate and royalty interests.