Oil and Gas Royalties should not be viewed as one property is better than the other, and for that reason should be considered as a blend with traditional brick and mortar when identifying replacement properties. You will find that every type of asset has its particular benefits and so too, does oil and gas royalties.
Royalties should be viewed as a means of diversifying your asset replacement selection for your tax-deferred exchange. If “cash flow” with no expenses and double-digit returns is your objective, then royalties are the right choice. Since the IRS will allow the identification of “3” replacement properties for a tax-deferred exchange, a reasonable approach would be to identify royalties as one of your choices as replacement property.