Royalty Interests

1031 proceeds can also be invested into properties that possess mineral and royalty investment opportunities. Royalty interests are different than drilling programs that involve the prospecting & exploration aspect of mineral resources, royalty interests involve current cash flow from resources that are already proven and producing. Investors have no liability to the drilling operation and simply collect the royalty from the daily production occurring on the property. Royalties are reliant upon the current price and production level of the underlying commodity but typically pay a higher income than most options.

Royalty interests provide an additional way to diversify for a 1031 exchange investor. While the program invests in real estate, the income derived is based upon the daily price and production of the underlying resources, not a pass-through vehicle for rental and lease income. The holding period is typically between 7-9 years.

Strengths

Diversifies a typical 1031 exchange
Generally pays a high current income
Can still be 1031 exchanged upon liquidation
15% depletion allowance of income

Weaknesses

Of course, as with any investment, there are limitations to consider, and a few for the DST are:

Income is variable, as it relies upon price and production of resources
No control over timing of sale
Long holding period (10+ years)

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