Oil, gas and mineral interests are real estate interests which qualify for a like-kind exchange with any other qualifying real estate interest including —
A mineral interest is a perpetual interest on all of the minerals on a parcel of land including oil and gas, coal, gold, sand, gravel, water, etc.
There are several different kinds of ownership of oil, gas and mineral interests which include —
A mineral lease gives the lessee the right to extract the mineral for a period of time, or until exhaustion of the mineral. Mineral leases are sometimes referred to as a working interest or an operating interest. The lessee is the operator who is extracting the mineral. A mineral lease can be subleased to other operators.
An exchange of a working or operating interest might include equipment or other tangible personal property which would need be viewed as a multi-asset exchange (more than one kind of property).
A production payment is a right to the mineral in place for a specified sum of money, payable out of a specified percentage of the mineral production. It is a "carved out production payment" and is not considered real property for exchange purposes.
Depletion expense can be deducted by the owner of an operating or royalty interest. There are two types of depletion: percentage depletion and cost depletion. Taxpayers use the method that yields the highest deduction.
Intangible drilling costs are operating costs to extract the mineral. Costs for fuel, preparation of a site, and wages are examples of intangible drilling costs.
Mineral property exchanges may be subject to recapture under Section 1254 if deductions were taken for depletion or intangible drilling costs on the relinquished property. The replacement property must be both like-kind and natural resource recovery property (Section 1254 property) to avoid recapture.