1031 Exchange Glossary: Oil & Gas-Related Terms

Assignment of Lease – The transfer of leasehold rights from one party to another, often used in 1031 exchanges involving oil and gas properties.

Bonus Payment – A one-time upfront payment made to a mineral rights owner by a lessee in exchange for executing an oil and gas lease.

Cost Depletion – A tax deduction method that allows investors in oil and gas properties to recover their capital investment over time.

Drilling Participation – An investment structure where an investor directly funds drilling costs and receives a share of the production, which may qualify for 1031 exchange treatment.

Forced Pooling – A legal process that allows resource extraction to occur when multiple mineral rights owners cannot agree, potentially impacting exchangeable property interests.

Gross Overriding Royalty Interest (GORR) – A type of royalty interest carved out of a working interest, often structured in a way that qualifies for a 1031 exchange.

Held by Production (HBP) – A lease status where oil and gas production continues to maintain the lease rights without requiring renewal, affecting investment longevity in 1031 exchanges.

Intangible Drilling Costs (IDC) – Costs associated with oil and gas well preparation that are not tied to tangible equipment but are sometimes factored into investment exchanges.

Landman – A professional responsible for negotiating oil and gas leases and verifying mineral ownership, playing a key role in exchanges involving resource properties.

Leasehold Interest – The right to explore and extract minerals from a leased property, which may be exchanged under certain 1031 exchange structures.

Master Limited Partnership (MLP) – A publicly traded partnership structure commonly used in energy investments but typically does not qualify for 1031 exchanges.

Mineral Deed – A legal document transferring ownership of mineral rights, which can be included in 1031 exchanges when properly structured.

Mineral Interest – Ownership of subsurface rights to oil, gas, and other minerals, which can be exchanged for other like-kind interests in a 1031 exchange.

Net Revenue Interest (NRI) – The percentage of production revenue an owner receives after deducting royalty payments, an important factor in 1031 exchange valuations.

Non-Participating Royalty Interest (NPRI) – A royalty interest that entitles the owner to a share of production revenue without any drilling or operational costs, potentially qualifying for a 1031 exchange.

Overriding Royalty Interest (ORRI) – A non-ownership interest in oil and gas production revenue, which may be structured to qualify for a 1031 exchange.

Pooled Unit – A combination of multiple oil and gas leases to form a single drilling unit, impacting how ownership is exchanged under 1031 rules.

Production Payment – A financial interest granting an investor a percentage of production revenue until a specified monetary threshold is reached, which may affect exchange qualification.

Proved Developed Producing (PDP) Reserves – Oil and gas reserves that are actively producing and considered lower risk, making them attractive in 1031 exchanges.

Proved Undeveloped Reserves (PUDs) – Reserves that are known but require additional investment to develop, affecting their treatment in exchanges.

Royalty Deed – A document transferring a royalty interest in oil and gas production, which can be part of a 1031 exchange if properly structured.

Royalty Trust – A financial entity that holds and distributes income from oil and gas production but typically does not qualify for 1031 exchanges.

Severance Tax – A tax imposed on the extraction of natural resources, which must be considered when evaluating replacement property investments.

Shut-In Royalty – Payments made to royalty owners when a well is temporarily inactive, impacting cash flow considerations in a 1031 exchange.

Surface Rights – Ownership of land above mineral deposits, which is distinct from mineral rights but may be involved in exchange transactions.

Tax Basis Adjustment – The recalculation of an investor’s basis in exchanged oil and gas properties, impacting future tax liability.

Title Opinion – A legal document verifying ownership of mineral rights, essential for ensuring compliance in a 1031 exchange transaction.

Undivided Interest – A shared ownership interest in mineral rights, which can be structured to qualify as like-kind property in an exchange.

Unitization – The consolidation of multiple mineral leases into a single operating entity, affecting how properties are valued for exchange purposes.