In a typical 1031 exchange, you can exchange real estate for other real estate. But many taxpayers wonder if you can also exchange oil and gas rights.
Not all oil and gas programs qualify for 1031 exchange. So you have to be very cautious because not every deal that is set up as an oil and gas deal will work. This is particularly true for partnership deals, because if you own a partnership interest it doesn’t qualify for 1031 exchange.
Trading Deductions
Consider this situation: Let’s say you fully depreciate your single-family rental property. There’s nothing left but the basis in the underlying land. Then you take your profits in a 1031 exchange and parlay it into an oil and gas program that doesn’t allow depreciation, but allows a different kind of deduction called a depletion deduction for the theoretical depletion of the oil and gas reserves in the land that is the subject of the program.
In this situation you can trade one kind of deduction (the depreciation deduction) for a different kind of deduction (the depletion deduction). That could create some tax efficiency that would offset or mitigate the tax on your income. This is a creative way to pivot from a traditional real estate investment into an oil and gas program.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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