Why an Oil & Gas Royalty Qualifies for a 1031 Exchange #2

A 1031 Like is a tax deferring exchange of like kind property that is authorized by section 1031 of the Internal Revenue Code stating:
No Gain or loss shall be recognized on the exchange of property
Held for productive use in a trade or business or for investment is
Such property is exchanged solely for property of like kind which is
To be held for productive use in a trade or business or for investment”

There are two kinds of property that the IRS recognizes: Personal and Real property. Real property is land and the rights to that land both above and below the surface. Real property and Personal property will never be viewed as Like Kind property by the IRS.
“Like Kind” refers to the character of the property and not its quality. For this reason, all Real Property is considered Like Kind by the IRS. For property to qualify for a Like Kind exchange the property must have been held for an investment or for productive use, and the replacement property must be used for the same thing.
An individual wanting to exchange real property for oil and gas royalties, the property must be one held for income or investment purposes. An example would be a rental property used to generate monthly income.
Some property has been excluded from a Like Kind exchange by the IRS such as stocks, bonds, certificates of trusts are all not eligible for an exchange. This is because of the nature of these types of property as discussed earlier. However, these instruments in and of themselves are not real property so they cannot qualify for a Like Kind exchange, unlike oil and gas royalties.