1031 Exchange Alternatives

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                            Frequently Asked Questions

What are oil and gas mineral, royalty and overriding royalty interests?

How is the value of my royalty interest determined?

What kinds of property are eligible for 1031 Tax-Deferred Exchange into Gas & Oil Royalties?

What types of property do not qualify for a 1031 exchange into Gas & Oil Royalties?

How can I transfer my interest to my heirs before I die?

How do I calculate my royalty interest?

Am I obligated to sell if I ask to receive an offer for my interest?

What are future predictions for oil and gas prices?

If my question was not covered, where do I go?

What are oil and gas mineral, royalty and overriding royalty interests? [top of page]]

Minerals, royalties and overriding royalties receive revenues from the production of oil and gas from a well without paying the drilling or monthly operating expenses from the well. The term "royalties" can be used interchangeably to mean mineral interests, royalty interests, or overriding royalty interests. However, there is a difference between minerals and royalties, and an even greater difference between overriding royalties and both minerals and royalties. The similarity between mineral interests and royalty interests is that both involve ownership of minerals under the ground. Both receive portions of the income from the production of oil and gas. However, the difference is that the owner of a mineral interest also has the right to execute leases as well as collect bonus payments; whereas, the owner of royalty interests does not execute leases or collect bonus payments. Even though mineral and royalty owners receive income when the well is producing, only the mineral owner receives the bonus payment upfront. Overriding royalty interests does not constitute an ownership of minerals under the ground. Rather, it constitutes ownership of a portion of generated revenues from oil and gas production in which the ownership expires when the lease has been neglected due to termination of production. Overriding royalties are created from the working interest. Therefore, like mineral and royalty owners, overriding royalty owners also receives a portion of the income from the production of oil and gas. However, the difference is owners of overriding royalty own only proceeds from the production of minerals and not the minerals under the ground. Overriding royalty interest expires once the lease has expired and production has stopped, whereas, minerals and royalties owners maintain their ownership after production stops.

How is the value of my royalty interest determined? [top of page]
Value is based on current production and estimates of proven reserves. Royalty investment is centered on proven oil & gas production numbers (past, present and projected). -not with the current price of oil & gas. To determine a fair sales price on your interest, a registered professional petroleum engineer performs an engineering and economic evaluation, such as analyzing historical production data, calculating production decline rates, and reviewing historical cash flows. The information is then used to forecast future well performance, calculate remaining oil and gas reserves, and predict future revenues.

What kinds of property are eligible for 1031 Tax-Deferred Exchange into gas & oil royalties? [top of page]
Any property held for productive use in a trade or business or property held for investment purposes can be exchanged for any like-kind property; property may be real or tangible property such as an apartment building, raw (vacant) land, single family rental, shopping center, 30 year or more leasehold interest; like- kind property refers to the nature of the property (i.e. held for use in a business or for investment) not the use of the property - so bricks and mortar real estate is fully eligible to exchange into oil & gas royalties; a shopping center may be exchanged for an apartment building or an apartment building may be exchanged for office or industrial or vice versa; furthermore, one property can be sold and three properties acquired; or four properties can be sold and one acquired.

What types of property do not qualify for a 1031 exchange into gas & oil royalties? [top of page]
Stocks, bonds, partnership or LLC interests, personal residences and stock in trade or inventory.

How can I transfer my interest to my heirs before I die? [top of page]
There is a required conveyance document that an attorney can generate. If you need the name of an attorney to contact, please call us at 800-466-2003.

How do I calculate my royalty interest? [top of page]
Divide the number of mineral acres you own within a well's producing unit by the totsal acres within the well's unit, and multiply this by your royalty interest as listed in your oil and gas lease.

Am I obligated to sell if I ask to receive an offer for my interest? [top of page]
You are not obligated to sell your interest when asking for an offer. Furthermore, receiving an offer does not mean you're committed to selling your interest either.

What are future predictions for oil and gas prices? [top of page]
Since experts cannot agree on oil inventories and prices, it is impossible to have a clear prediction what prices will do. Therefore, we feel the best approach is to not get carried away on predictions and forecasts.

If my question was not covered, where do I go? [top of page]
If your question was not covered in this section, please feel free to Contact Us at 800-466-2003 or email us with your question. We will be more than happy to help you or direct you to someone who can answer your question.