The Benefits of Oil and Gas Royalties:
In the past three months Exchange Solutions Group has been witness to a most interesting and ingenious trend. A group of savvy local real estate investors, who owned fully depreciated rental property (Adjusted Basis of practically Zero), desired to defer Capital Gains but lacked the optimism to reinvest locally in rental real estate. To solve this problem, these investors bought oil and gas royalty interests that qualify for 1031 exchange treatment (yes, royalties are "like-kind" with rental real estate). These investments were cash flow rich and chock-full of depletion (depreciation's equivalent in the mineral interest world). Thus, in one fell swoop, investors were able to defer their Capital Gains taxes, obtain property with strong cash flows, AND inherit fresh, tax deductable depletion schedules.
The lesson to be learned is that creativity can be a key component of a successful 1031 exchange. Who says you have to trade office space for other office space, or land for land? No one! Under the correct structuring, the 1031 tax exchange can be quite flexible and fit many needs.
For more information about Oil & Gas Royalties and the 1031 Exchange, click here.
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