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1031 Exchange
Oil & Gas Replacement Property
Capital Gains Tax Deferral via 1031–Exchange
Perhaps no single industry is more closely associated with Texas and the oil producing southwest than
the oil and gas industry. Despite significant diversification of the Texas economy in recent years, the
energy industry is still a major component of this economy.
1031 Exchange: From the 1960s investors have benefited greatly from the opportunity of investing all
or part of the proceeds of a traditional Real Estate sale into "oil and gas minerals" with capital gains tax
deferral benefits. To better understand how you can benefit from the 1031 Exchange, realize that
mineral property is "real property" that can have several different forms. Mineral property includes
hydrocarbons (oil, gas, and coal); hardrock minerals (gold, silver, copper and other metals). So,
subsurface minerals and royalties are considered Real Property and ownership is conveyed by deed. In
most cases, the investment is considered like-kind Replacement Property for the purposes of a 1031Exchange.
For the past four years, uncertainty in the stock markets, apprehension of tax increases, uptick in
inflation, and very low interest rates have all driven accredited investors to re-evaluate their assetallocation strategies. Traditionally, many of these investors have invested their money in commercial
real estate to bolster their portfolios’ overall performance. However, enduring uncertainties in the
current real estate markets have made this investment vehicle increasingly worrisome. And that could
be the motivating criteria for diversifying a portion of one’s portfolio into mineral royalty-based
investments. The bottom line is that it can make a potential and encouraging difference.
Oil and gas royalty ownership provides a hard asset opportunity for accredited investors to diversify into
the energy market without absorbing the typical costs and certainly the risks related to drilling and
production. Institutional investors, as well as well established and funded foundations have long relied
on this investment strategy, holding a significant percentage of their investment portfolios in
alternatives such oil and gas royalties.
Hard Asset Ownership
Traditional Real Estate
Surface land and/or buildings
built upon the land are
considered real property.
Ownership is conveyed by deed
and is 1031-Exchange Eligible
Oil and Gas Royalties
Subsurface Minerals and
Royalties are considered real
property. Ownership is conveyed
by deed. The property is 1031Exchange Eligible. With Platform
Royalties, LLC the interest
ownership can include small
acreage positions in many
different unitized sections
and/or geographically diverse
fields.
Cash Flow Potential
Cash flow is created by rents
collected from tenants according
to the leasing agreement.
Diversification is key to
consistent monthly income
potential––the more units
owned, the more stable
the cash flow potential.
With oil and gas royalties the
cash flow is generated from the
combined monthly production
sales from each well producing
throughout the acreage. Cash
flow may be enhanced with
addition of flush production
from recently drilled wells.
Appreciation Potential
Market value of real estate is
influenced by overall economic
conditions, specific market
conditions, and condition of
property. Because property
prices are a function of local
supply and demand, the
appearance, functionality and
maintenance of the physical
structure will certainly impact
value. Property improvements
can add to appreciation
potential. Real estate owners
bear all of the liabilities and
expenses of improvements
and/or additional development
on the property.
Market value of royalty interests
is determined by the estimated
value of reserves in the ground
(as defined by existing and
future commodities pricing). The
ongoing development “proves”
up additional reserves
and adds to potential overall
value. Mineral & Royalty Interest
owners assume none of the
liabilities and expenses of
improvements and/or
development.