Income, Diversification, and Liquidity
Oil & Gas Portfolios
Diversify your real estate portfolio with Oil & Gas properties. Invest your 1031 exchange proceeds alongside leading institutions in oil and gas portfolios designed for income generation and value appreciation.
1031 Exchanges
Generates Income
Value Appreciation
Assumable Loans
Diversification
Tax Benefits
Topics Covered
Why explore Oil & gas For Your 1031 Exchange?
Royalties and mineral rights are considered real property and are generally deemed "like-kind" to traditional real estate, which qualifies them for use in a 1031 exchange. Mineral owners hold an interest in the subsurface estate and are entitled to compensation for any resources produced from their land. As energy companies drill wells and produce hydrocarbons, they pay the mineral owner a royalty, leaving the investor free from operational costs, drilling risks, and other liabilities.
Diversification
Royalties & minerals provide an opportunity for investors to step away from traditional real estate and diversify into a different asset class with exposure to different economics.
Cash Flow
Low distributions based on compressed capitalization rates have left many traditional real estate investors hungry for higher rates of return. Minerals & Royalties have the potential to experience an acceleration in cash flow caused by the drilling of additional wells by oil & gas operators.
Independence
Owners of undivided interests in royalty properties are not locked into an ownership structure that links them to other investors in the same property. Each owner is free to exercise control over holding period and exit strategy to suit individual investment objectives.
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Meet Baker 1031 Properties
At Baker 1031 Properties, why we do what we do is the foundation of everything we build. For our clients, that purpose makes a powerful difference in their experience and, more importantly, in their outcomes.
Frequently Asked Questions (FAQ)
What do investors want to know about Oil & Gas?
Do mineral rights qualify for a 1031 exchange?
Generally, yes, mineral rights (specifically the ownership of the underground oil, gas, and other minerals) are often treated as an interest in real property by the IRS, making them eligible for a Section 1031 like-kind exchange. However, they must be held for productive use in a trade or business or for investment.
Are oil and gas royalties considered like-kind property for a 1031 exchange?
Yes, oil and gas royalties, when structured as an interest in real property (a fee simple interest in the minerals, rather than just a contractual right to income), can qualify as like-kind property. This allows a mineral owner to exchange their royalty interest for other real property, such as investment land or commercial real estate.
What is the difference between exchanging a working interest versus a royalty interest in a 1031 exchange?
A Royalty Interest is passive (non-operating) and generally qualifies as real property for a 1031 exchange.
A Working Interest involves operational risks, liabilities, and ongoing expenses. It is often treated as a general partnership interest or a business asset, which may not qualify for a 1031 exchange unless the working interest is structured to be the functional equivalent of real property in the specific state.
Can I exchange real estate for mineral rights using a 1031 exchange?
Yes. Since both mineral rights (when considered real property) and investment real estate are typically classified as "like-kind," you can use a 1031 exchange to exchange proceeds from the sale of an investment property into qualifying mineral rights, or vice-versa.
How can I use a 1031 exchange to defer capital gains tax on the sale of mineral rights?
By utilizing a 1031 exchange, you can defer the payment of capital gains tax and depreciation recapture tax that would normally be due immediately upon the sale of your mineral rights, provided you reinvest the entire sale proceeds into a replacement property of equal or greater value within the strict 1031 deadlines.
What are the IRS rules (Section 1031) regarding the exchange of oil and gas properties?
The key rule is that the property being sold (relinquished) and the property being acquired (replacement) must be like-kind. For oil and gas, this means exchanging one real property interest (e.g., qualifying mineral rights) for another real property interest (e.g., another mineral interest or traditional real estate). You must also use a Qualified Intermediary (QI) and adhere to the 45-day identification and 180-day closing deadlines.
How does a Qualified Intermediary (QI) handle the exchange process for mineral royalties?
The QI plays a crucial role by taking constructive receipt of the sale proceeds from the mineral rights, holding them in an escrow account, and then disbursing those funds directly to the seller of the replacement property. This prevents the mineral rights owner from ever touching the money, which is required by the IRS to qualify for tax deferral.
What replacement property can I acquire with the proceeds from selling mineral rights in a 1031 exchange?
You can acquire any like-kind investment real property. This includes other mineral rights, royalty interests, investment land, commercial buildings, apartment complexes, or single-family homes held for rent.
Does selling fractional mineral rights qualify for a 1031 exchange?
Yes, the fractional nature of the interest does not disqualify it. If the underlying property interest (the mineral right) qualifies as real property for investment purposes, it can be exchanged under Section 1031.
How is 'boot' or non-like-kind property treated in a mineral rights 1031 exchange?
Boot is any cash received or debt relief that is not replaced in the exchange. Any boot received—whether cash, promissory notes, or non-qualifying property—is considered taxable income and is subject to capital gains tax.
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Terms Glossary
Common Oil & gas Terms
1031 Exchange
A transaction permitted under IRS Section 1031 that allows an investor to defer capital gains tax on the sale of investment property by reinvesting the proceeds into like-kind property within specific deadlines.
Mineral Rights
The ownership interest in the oil, gas, and other minerals beneath a tract of land. When held for investment, mineral rights are often treated as real property and may qualify for a 1031 exchange.
Oil and Gas Royalties
A passive, non-cost bearing interest in the production of oil and gas. Properly structured oil and gas royalties can qualify as like-kind property for a 1031 exchange.
Like-Kind Property
In the context of a 1031 exchange, this term refers to real property that is exchanged solely for other real property. For example, investment mineral rights are often considered like-kind to investment real estate.
Qualified Intermediary (QI)
A neutral, third-party entity mandated by the IRS to facilitate a 1031 exchange. The QI holds the proceeds from the sale of the relinquished property (e.g., mineral rights) to prevent the investor from receiving the funds directly.
Working Interest
An operating interest in an oil and gas lease that includes the right to explore and produce minerals, but also carries the burden of costs, liabilities, and operational control. Working interests are typically not considered like-kind for a 1031 exchange unless they are structurally limited.
Fractional Mineral Rights
An undivided, percentage-based ownership of the mineral rights under a specific parcel of land. The sale of fractional mineral rights can still qualify for a 1031 exchange if the underlying asset is classified as investment real property.
Boot
Any cash, debt relief, or non-like-kind property received by the investor in a 1031 exchange. Receiving boot will result in a taxable gain, partially defeating the goal of the tax deferral mineral rights strategy.
Relinquished Property
The investment property (e.g., mineral rights or oil and gas royalties) being sold by the investor in a 1031 exchange.
Replacement Property
The new investment property (e.g., real estate, or other qualifying mineral interests) being acquired by the investor with the proceeds from the sale of the relinquished property.
Learn more about Baker 1031 Properties at FINRA's Broker Check
The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Such offers are only made through the Sponsor’s Private Placement Memorandum (PPM) which is solely available to accredited investors and accredited entities. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney.
There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potentially adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk. Because investor situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation.
Securities offered through Aurora Securities, Inc. (ASI), member FINRA/SIPC. Baker 1031 Properties (Baker 1031) is independent of ASI. To access Aurora Securities’ Form Customer Relationship Summary (CRS), please click HERE. Baker 1031 Properties, Jerry Baker, and (ASI) do not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances.
Client examples are hypothetical and for illustration purposes only. Individual results may vary.
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¹The statement that "Over 30% of all experienced real estate investors work with Jerry on their 1031 exchange" is a market share estimate derived from an analysis of third-party market data as of October 2025, representing the proportional relationship between the Baker 1031 Investment investor database and an estimated total market of active real estate investors; this estimate is based on Crexi reporting a 2,000,000 user base, 80% of whom are assumed not to be agents/brokers, and 42% of activity dedicated to investment sales, from which a conservative assumption excludes 15.7% as non-investor service providers (e.g., appraisers, lenders), resulting in an estimated active investor market of 566,664; as the Baker 1031 Properties database comprises over 170,000 individuals or entities, this figure represents 30.00% of the estimated market. Important Compliance Disclosure: The figures and calculations provided constitute a market share estimate based on unverified third-party data and internal assumptions utilized to define the estimated market; Baker 1031 Properties has not independently verified the accuracy of the underlying data, and the term "experienced real estate investors" is defined exclusively by this methodology and its internal assumptions. This communication is not a guarantee of future results, a testimonial, or a statement of performance for any investment product or service, and its accuracy is subject to the inherent limitations of the underlying data and the validity of the internal exclusion assumptions.