Tax Savings Through 1031 Like-Kind Exchange

Petroleum Strategies, Inc. ("PSI"), was founded in 1991 to assist oil and gas asset managers in structuring the sale of properties within oil and gas portfolios to qualify for tax savings under IRS Section 1031 regulations. Over the past 13 years, PSI has established a reputation as the expert in providing 1031 Qualified Intermediary service to the oil and gas industry. The company has facilitated over $13 billion in exchange transactions, providing service to some of the nation’s most respected petroleum companies. Consultation with each client is designed to help refine the exchange procedures and to structure the transaction so that the client is placed in the most advantageous tax position. The goal of PSI and its staff is to provide the best possible service to the client at minimal cost. As the result of 13 years’ experience and the expertise of its staff, this goal can be accomplished, even when transactions must be handled on very short notice.

• Two CPAs on staff.
• Legal counsel with Section 1031 expertise.
• Over $13 billion in exchange transactions.
• Exchange transaction values from $20,000 to $200,000,000.
• Specialized expertise in oil and gas transactions.
• Facilitation of like-kind exchanges at oil and gas property auctions—for both buyers and sellers.
• Experienced in facilitating client participation in Federal offshore lease sales.
• Experienced in servicing "reverse" exchanges and transactions governed by Rev. Proc. 2000-37. (Contact Exchange Manager for further information)
• Nationwide client base, including major oil companies, independent operators, and individuals.
• Documentation prepared by legal experts in oil and gas, along with specialists in Section 1031.

Like-Kind Deferred Exchanges

One of the primary considerations in the sale of oil and gas properties is the tax obligation resulting from the sale. Because most properties being sold were drilled by the seller or have been held for a long period, while being depreciated and amortized, the tax basis in the properties is very low. Most sales of assets, therefore, result in a taxable gain to the seller.

If the seller is willing to reinvest the proceeds in other property (property of like-kind), the sale may be structured as a like-kind exchange, with no gain or loss recognized at the time of the sale. As a result, as much as 40% of the cash from the sale may be retained for use in the business.

Under tax regulations issued in 1991, the IRS provided for the use of a Qualified Intermediary to accomplish a "deferred exchange," whereby the relinquishment and replacement of property could occur at different times.

Limitations on the Taxpayer of Like-Kind Exchanges

• Upon the sale of the relinquished property, the taxpayer must specifically identify replacement property within 45 days.
• The closing on the purchase of replacement property must occur no later than 180 days from the date of the original sale.
• Two rules of property identification apply: (1) Three properties of any value; or (2) an unlimited number of properties, with the combined value not to exceed 200% of the original sale proceeds.
• At no time can the taxpayer have the right to receive, pledge, borrow or otherwise obtain the benefits of the funds from the original sale.

Benefits to the Taxpayer of Like-Kind Exchanges

• Gain or loss on the sale of the property is deferred.
• Taxpayer is allowed to retain as much as 40% more cash for use in the business.
• Almost any transaction can be structured in order to accomplish tax savings without disrupting the basics of the transaction.
• IRS regulations specifically set forth the requirements to remain within safe harbors.
• Deferred exchanges can be used as a part of company-wide strategy to reduce taxes on asset portfolio shifts.
• Like-kind exchanges are not limited to oil and gas assets.

For information and/or free consultation regarding 1031 Like-Kind Exchanges contact: