1031 Real Estate Exchange For Oil and Gas Production

One of the most unique aspects of the 1031 Real Estate Exchange for Oil and Gas Production/Exploration process is the ability to rebalance or diversify the real estate sector of an investment portfolio by relinquishing a property or properties for a “fractional interest” in an oil and gas production as a “like kind” property.

A “fractional interest’ is considered similar to a “tenant-in-common” ownership structure in real estate by the Internal Revenue service for purposes of a 1031 Exchange. In today’s economic environment, with residential and commercial real estate continuing to decline in value, ownership of a “fractional interest” in oil and gas production is a very attractive 1031 Exchange as the price of a barrel of oil has more than doubled in 2009.

A “fractional interest” in an oil and gas production offers a steady income stream without tenant concerns. The purchase of a “fractional interest” in a qualified working interest can provide the 1031 Exchange buyer the stability of an immediate closing with a predictable cash flow stream. When oil and gas prices rise, the buyer in the 1031 Exchange can also participate in the future production price gains with payment based on the rising commodity prices over the long term. Each fractional owner of an offering has the same rights as a single owner and can subdivide or offer for sale their ownership interest at any time on the open market, providing liquidity when needed after the 1031 Exchange is completed.

Many times, a “fractional interest” in oil and production can yield greater liquidity than other real estate investments for the buyer after the 1031 Exchange. There is an active secondary market for established oil and gas production. This allows the buyer after the 1031 Exchange to sell directly to other 1031 Exchange buyers or investors. Auctions specializing in oil and gas production based on projected production and the commodity prices also sell these assets. Traditional lenders will allow qualified borrowers to leverage substantial portions of the oil and gas “fractional interest” acquired through a 1031 Exchange.

Working interest in oil and gas provides Direct Assignment; investors receive legal title to the percentage of the working interest purchased. As a result, direct investments may provide an attractive 1031 Exchange opportunity for individuals and companies which are seeking to reinvest capital from investments in real estate sales. You should retain a qualified lawyer or Qualified Intermediary before attempting a 1031 exchange to make sure a 1031 exchange is possible and that it is structured and executed properly.

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