Lawful Replacement Property - First, this is a lawful exchange. In a 1968 ruling, the IRS clarified that mineral rights are “real property” and met the definition of “like kind” for an exchange.
Diversification - Minerals provide a unique replacement property and diversification from traditional brick & mortar real estate. This asset is about more than monthly cash flow, although significant cash flow can be created, mineral ownership is long-term in nature. Your acquisition of minerals gives you the ownership of every barrel of oil and MCF of gas from the mineral property you acquire.
Size Flexibility - Minerals offer a replacement property “fill in” - minerals can be purchased by the acre and therefore allow the flexibility to purchase minerals to the exact dollar amount required to “fill in” any remaining balance within a 1031 exchange transaction.
Dual Revenue Streams -
- Exploration & Production (E&P) Lease Payment - the E&P company will pay mineral owners a per acre bonus to have the rights to drill.
- Royalty Payment – Mineral ownership generates income through oil & gas lease royalty payments, up to 25% of the total production revenue.
Passive Income - Royalty income, often referred to as “mailbox money” is paid to the mineral owner so long as the oil & gas wells produce.
Zero Operational Costs - Mineral ownership has no operating costs – you own the minerals but have none of the costs of extracting the oil and gas.