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As investors reassess real estate strategies in a higher-rate environment, some are turning to oil and gas mineral rights as a fully passive, tax-efficient alternative to owning and operating property.
I’m one of them. Here’s why.
The exchange treadmill
Every real estate investor knows the cycle:
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- Buy a property
- Operate it
- Sell it
- Roll the gain and the depreciation recapture into another property through a 1031 exchange
- Do it again
It works … until you realize you’ve been on a treadmill for 20 years.
Every exchange puts you back into another operating asset:
- More tenants
- More employees
- More vendors
- More capital calls
- More risk
Operating properties isn’t for the faint of heart. It’s not passive income; it’s work.
Mineral rights get you off the treadmill.
What you’re buying
Oil and gas mineral rights are a deeded title to everything below the surface. You own it the same way you own a piece of dirt — with a deed, recorded in the county.
Companies drill on your minerals and pay you a net royalty, typically 20% to 25% of revenue. It’s not profit; It’s revenue.
- No operating costs
- No capital calls
- No profit and loss risk
- No insurance
- No property management
When they’re drilling $100 oil, you’re getting $25 a barrel with no work.
Here’s what most people miss: When they find more production — a new formation, a new drilling technique, more wells per section — you get all of it. If they go from one well per 640 acres to four to 10, you participate in every barrel. Everyone else does the work. You hold the deed.
Why now?
Three things are converging.
The capital stacks are broken. More than $600 billion of multifamily debt matured across 2024 and 2025. Borrowers who underwrote at 3% floating rates are staring at 7% refinance quotes. Values are down 20% to 30% in major markets.
The thing you’d normally exchange into — operating real estate — is harder to underwrite today than at any point in the last 15 years.
Energy production is at record levels. The U.S. is producing more than 13 million barrels a day. Natural gas demand is accelerating — driven by AI infrastructure, data centers and a power grid that can’t keep up.
The drilling activity that generates your royalty checks isn’t slowing down.
The tax treatment hasn’t changed. Mineral rights qualify as like-kind property under Section 1031. You can exchange directly from a condo project, a multifamily asset or any investment real estate into minerals. Defer the gain, defer the recapture. then never exchange again.
That last part is the point. The 1031 is designed to keep you in the game. Minerals let you use it one last time — and step off.
The tax math
Royalty income gets the percentage depletion allowance — 15% of gross income, deducted off the top, regardless of your cost basis. That’s not depreciation. Depreciation requires basis and runs out. Depletion doesn’t. It shelters income for as long as the minerals produce.
Then there’s the estate play. You hold the minerals. You collect income. When you die, your heirs receive a stepped-up basis.
All the gain and recapture you deferred through exchanges is wiped out. Instead, they inherit at fair market value and can sell at par without paying tax on decades of deferred gain.
None of this is tax-free; it’s tax-deferred. But defer through your death and let your heirs get the step-up, and the practical result is the same.
How it fits
I think about portfolio construction in layers:
- Distressed debt for high current yield
- High cap rate real estate for depreciation
- Development projects for internal rate of return (IRR)
- Minerals to satisfy the exchanges and get off the treadmill
Each layer does a different job. Minerals are the anchor — the asset you never sell: monthly income; no operating burden; tax-sheltered through depletion; and a clean basis for the next generation.
You’re exposed to commodity prices. If oil drops to $60, your checks shrink. That’s real. But there’s no debt service, no operating costs and no capital calls on the other side. The downside is a smaller check, not a margin call.
Compare that with the operator sitting on floating-rate bridge debt with a rent roll that came in 8% light and a lender who won’t extend. That’s the kind of risk that wipes out equity.
The bottom line
Operating real estate builds wealth. I’ve spent my career doing it. But the 1031 treadmill keeps you locked into that cycle, whether the market rewards it or not.
Minerals are the exit ramp:
- Deeded ownership
- Monthly income
- No operations
- A tax structure that lets you defer until you die and pass it clean to your kids
In a market in which the capital stacks are broken and the next direct buying window is still years away, that’s not a bad place to sit.
