What is the 1031 Exchange Requirement?

An exchange of your working or royalty interest for another working or royalty interest qualifies for a 1031 Real Estate Exchange. You can also complete:

• Mineral exchanges in exchange for a city lot
• An oil exchange or oil drilling exchanges of equipment
• And a working or royalty interest for other real estate

For example, if you sell a working interest you could replace it with another working interest, a royalty 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 meet the 1031 Exchange requirement.

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 IXG for specifics.

Oil and Gas Intangible Drilling Costs

The costs you incurred to drill and develop the well site 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.

The American Oil and Gas Coalition has consultants on their team that can explain the complexities of the oil and gas exchange. Their depth of knowledge and understanding of this process will give you the security needed to complete your exchange.

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