Wendy Gallagher
There are distinctive types of oil, gas, and mineral interests. A mineral estate is the perpetual interest in all the minerals on the land, and they are generally divided into leases, royalties, and production payments.

An Oil, Gas and Mineral Interest, often referred to as a working or operating interest, is a percentage of ownership in an oil, gas or mineral lease, and is considered a real property interest for federal tax purposes and therefore eligible for a 1031 tax deferred exchange. A working interest allows the lessee to enter the land and extract oil, gas and minerals for a set period of time or utill exhaustion, and with that, the obligation to incur the cost of operating expenses such as exploration and extraction. Often times, the sale of working interests include the sale of related equipment and other tangible personal property. If this is the case, the equipment can either be sold or handled as a separate personal property exchange.

A mineral royalty is a non-operating interest wherein the owner does not incur any cost of production, and receives a designated percentage of all minerals produced for the life of the property interest. A royalty interest is also considered real property for federal tax purposes.

A production payment is the right to a specified share or production from a mineral property when that production occurs. It is a carved out payment and is not considered real property for federal tax purposes and an exchange of a production payment for real estate will not qualify under section 1031.

Both working interests and royalty interests are exchangeable with other working and royalty interests as well as with ownership in other real estate, such as an apartment building, office building or single family rental home.

Remember, there is no substitute for effective tax planning. Once you and your tax advisor have determined that a 1031 tax deferred exchange is appropriate Bankers Exchange Services will guide you through the exchange process to successful completion. Please contact Erica O’Leary or Wendy Gallagher with your exchange questions. You can reach us toll free at (877) 989-1031.