Although a new concept to most real estate investors, oil and gas royalties have played a more predominant role in 1031 exchanges over the past 10-15 years.
Because royalties are under the ground and not “tangible” like brick-and-mortar real estate, many investors assume that the asset class doesn’t meet the “like-kind” test that all 1031 exchanges must pass.
In fact, 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:
Revenue Rule 55-526
Revenue Rule 73-248
Revenue Rule 73-2117
Private Letter Ruling 8135048
Crichton v. Commissioner, 122 F. 2d 181
Palmer v. Bender, 287 U.S. 551