At LandGate, we have mineral owners constantly asking if they should lease their minerals or sell them. That’s a tough question, as not all mineral rights owners are in the same financial situation. And with the price of oil at ~$80 per barrel, many oil companies are not actively leasing. Mineral buyers, however, are definitely spending a lot of money these days.
A huge benefit to selling your minerals vs leasing them is that you are going to get paid a lot more to sell and there are some attractive tax benefits to selling mineral rights.
If you sell your minerals for more than your basis (value of the minerals when you acquired them), and you have owned the minerals for more than a year, then all or a portion of what you are paid will be subject to long-term capital gains taxes. A capital gains tax is a federal tax on profits from the sale of an asset.
If you lease your minerals, the lease bonus and royalty you receive is taxed as ordinary income.
The long-term capital gains tax rate is lower than the ordinary income tax rate.
One of the best tax benefits of selling your minerals is that you can take advantage of Section 1031 of the Internal Revenue Code. This is often called the 1031 Property Exchange or Like-Kind Exchange rule, meaning that as an alternative to paying long-term capital gains taxes, a 1031 exchange allows you to defer all taxes by reinvesting the profit from the sale of one property (“Relinquished Property”) into the purchase of another property (“Replacement Property”). To qualify for a 1031 exchange, the property being sold and purchased must fit the definition of “real property”. Real property can be defined as land, and anything growing on, affixed to, or built on it. This also includes man-made buildings as well as crops. Real property is best characterized as property that doesn’t move, or that is attached to the land. Real property may include not just the land, but anything that is permanently located within or under the land, to include oil and gas minerals rights. LandGate has a one-of-a-kind estimation tool to assist you in knowing what your property rights are worth. If you are considering the sale of your minerals, start with LandGate. And if you are looking for additional properties for a 1031 exchange, let us help.
THIS BLOG IS INTENDED TO BE INFORMATIONAL ONLY. WE ARE NOT INTENDING TO GIVE TAX ADVICE. PLEASE CONSULT A TAX PROFESSIONAL.
