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  • By Wolf Hanschen, Peregrine 1031 Energy Partners

1031 Option: Outside the Bricks

With the cap-rates on triple-net real estate properties compressed to their lowest levels in decades, investors are looking to alternative solutions for 1031 replacement property. One strategy more people are now using is the addition of producing energy royalties to their replacement property mix. With oil and gas prices near the bottom of their 15-year average, many investors see it as an opportunity to sell real estate at a high and buy into another asset class at a low. “It’s obviously a great time to be selling real estate but not so much buying it,” said Michael Hershenberg, a real estate professional who has referred 1031 clients to Peregrine for the past several years. “These royalty properties give my clients the opportunity to not only diversify their portfolio, but also to realize higher monthly income levels than they would with brick and mortar properties alone.” In 1968, the IRS published the Revenue Ruling 68-331 further clarifying Section 1031 of the 1954 Act. The ruling established that real estate ownership interests, whether above or below the ground, met the definition of “like kind” for an exchange.

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