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Why an Oil & Gas Royalty Qualifies for a 1031 Exchange #1


People have been investing in real estate for decades now. Real estate investing allows the investor to collect revenue, usually monthly, throughout the year. Real estate investing also gives the investor tax benefits as well. The cash flow received from rental properties is not subject to self-employment taxes. Government basically rewards individuals for investing in real estate properties, by also offering lower tax rates for long term profits.

Real Estate also offers a sense of protection against inflation from the market. Instead of fearing inflation, real estate investors and owners, in a sense, look forward to it. Property values inflate just like everything else in the market.

What few investors know is that Oil & Gas properties qualify as “Like Kind” for real estate investing. The IRS looks at Oil & Gas properties in the same way they look at an investment in real estate because they are both real property.

A type of exchange that many savvy real estate investors know about in the 1031 exchange. In 1954, the IRS passed an Act that allowed investors to defer their capital gains tax, so long as the money gained on the investment was re-invested into real estate.

What many are unware of, is that in 1968 the IRS published a clarification ruling titled Revenue Ruling 68-331. This clarification stated that real estate ownership interests, whether they are above or below the ground, qualify for the Like Kind Exchange. Investors can enter into an exchange from a real estate property above ground, into an oil and gas property that is below ground, such as owning minerals. Instead of rent revenue, investors begin to receive Royalty payments.