1031-Exchange-of-the-MonthThis month’s deal was a referral from a local Self-directed IRA Custodian. The Exchangor owned some rights in Oil located in Texas and was interested in acquiring several rental houses.

Oil, gas, minerals, water and timber rights are sometimes characterized as real property and other times as personal property. Characterization depends upon the nature and extent of the rights and not to the underlying real estate.

A working interest is considered a real property interest whereas a royalty interest is not. What is the difference? It is the Exchangor’s rights and obligations to access the property. A working interest is the exclusive right to enter land and extract oil, gas and minerals. It involves the right and cost obligation to explore, drill and develop the oil, gas and minerals. It also carries the obligation of paying for operating expenses.

When the sale of the Exchangor’s relinquished property closed we simply moved forward into the desired replacement properties as we normally would. Exchanging out of the Oil is no different than any other 1031 Exchange involving real property.

An interesting side note to the deal was the timing of the sale and the increase in gas prices we experienced during the period. Throughout our conversations with the Oil brokerage we had to ask their opinion on the spike in prices at the pump, they in a word described the spike as politics… That’s a whole conversation we’ll take on another time!