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What are Oil and Gas Mineral, Royalty and Overriding-Royalty Interests? |
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Minerals,
Royalties and Overriding-royalties receive revenues from the
production of oil and gas of 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, and 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 do not constitute an ownership of
minerals under the ground. Rather, it constitutes ownership of a
portion of generated revenues from oil and gas production - they are
created from the Working Interest. Therefore, like minerals and
Royalties owners, Overriding-royalty owners also receive a portion
of the income from the production of oil and gas; however, the
difference is owners of Overriding-royalties own only proceeds from
the production of minerals and not the minerals under the ground.
Overriding-royalty Interests expire once the lease has expired and
production has stopped, whereas, minerals and Royalty owners
maintain their ownership after production stops.
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Are Oil and Gas
Royalties eligible properties for a 1031 Exchange? |
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Yes. Since
the early 1040's, court rulings have affirmed that Oil and Gas
Royalties qualify as "Like-kind" to all other forms of Real
Property.
Due to these rulings, investors have been able to take advantage of
the 1031 tax deferral by exchanging between brick-and-mortar real
estate and Royalty Interests.
For more information regarding the IRS's position on tax-free 1031
Exchanges to natural Energy Interests, go to
www.irs.gov/irm/part4/ch35s03.html Then scroll down to:
4.41.1.4.6 (07-31-2002) Exchange of Property.
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What kinds of property
are eligible for 1031 Tax-Deferred Exchange into Energy Royalties? |
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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 or a 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 Energy Royalties; a shopping center may be exchanged for an
apartment building or an apartment building may be exchanged for
office or industrial buildings or vice versa; furthermore, one
property can be sold and three properties acquired; or four
properties can be sold and one acquired.
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When purchasing
Royalty Interests, do I receive title? |
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Yes.
Private Royalty Interest results in direct assignment. Investors
receive legal title to the percentage of Royalties purchased.
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When I own Royalties,
is my investment liquid? Are there options for selling if I choose? |
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Yes. An
active auction market exists and dozens of divestment firms allow
you to liquidate assets quickly to pursue new opportunities.
Typically transactions allow sellers to liquidate within 90 days.
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Can I invest in both
Royalties and Real Estate when I do a 1031 Exchange? |
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Yes. Real
estate has fixed price but a Royalty purchase can often times be
flexible in the amount of the investment you purchase. As long as
the minimum investment is met, the amount of royalties purchased can
be adjusted to the amount left on your 1031 Exchange.
This gives the buyer diversity and flexibility for both real estate
and energy. |
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