Like-Kind Exchanges in Oil and Gas

By Justin Lauderdale | Trackback URL Add comments
Justin Lauderdale

Like-kind Exchanges, or 1031 Exchanges, allow for the deferral of gain on trade or business or investment property when it is exchanged for similar property. Like-kind exchanges are often used by businesses to exchange cars or pieces of real estate. Similarly, you can use a 1031 Exchange for oil and gas properties as well.

Working interests and royalty interests are considered interests in real estate. As a result, not only can you exchange a working interest for another working interest and take advantage of deferring tax on the gain, you can exchange oil and gas interests with other types of real estate as well.

To qualify for Like-kind Exchange treatment, there are some limitations:

  1. The property relinquished and the replacement property must be trade or business property or be property held for investment.
  2. Upon the sale of the relinquished property, you have 45 days to specifically identify the replacement property. There are additional limitations if you identify more than three replacement properties.
  3. You must close on the purchase of the replacement property within 180 days of the sale of the relinquished property.
  4. The exchange must take place using a qualified intermediary.

For additional information on using 1031 Exchanges for oil and gas properties, see this article from 1031 Corporation.

Categories: Controller's Corner, Tax Compliance
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