What is a Mineral Rights Deed?
A mineral deed form is a legal document, regarding the ownership of the minerals below the surface of the earth. It is important to understand that surface rights and mineral rights, on the same piece of land, can be owned by different parties. A mineral rights deed does not discuss title to surface land or structures on the land, unless it is actually a warranty or quitclaim deed.
The mineral rights deed will, however, explain provisions allowing the mineral owner reasonable access to the surface land in order to develop the minerals. Mineral owners have legal rights to extract and sell their minerals, with or without the use of third-party companies. They receive a percentage of the income generated from the sale of those minerals, in peroration to their ownership. If a lease expires the ownership remains with the mineral owner.
Mineral rights deeds are not the same as royalty deeds. Royalty deeds do not allow for surface access, or for the initiation of the extraction and sale of minerals. A royalty owner will only benefit economically if the mineral owner decides to produce and sell the minerals.
Types of Legal Descriptions
There are several types of legal descriptions used in different contexts. The most common ones include:
1) Metes and Bounds Description
This type of description uses physical landmarks and measurements to define the boundaries of a property.
2) Lot and Block Description
Typically used in subdivisions, this description identifies a property by its lot and block number within a designated subdivision.
3) Rectangular Survey Description (PLSS)
This description uses principal meridians, baselines, range lines, and township lines to describe the location of a property in relation to a specific geographic area.
Township: A square of land, usually 6 miles by 6 miles, identified by its location north or south of the baseline and east or west of the principal meridian. The township number identifies how many cells the property is to the north or south of a starting point.
Section: A section is a one-square-mile area within a township, identified by its location in relation to the principal meridian and baseline. Sections are numbered from 1 to 36. It contains 640 total acres.
Range: The distance east or west of the principal meridian that a piece of property is located.
Basics of Mineral Rights and Tax Implications
Mineral rights refer to the ownership of underground resources like oil, gas, and minerals. When you sell these rights, the income generated is subject to taxes. There are nuances to consider, such as capital gains tax, which is levied on the profit made from the sale. For many mineral owners, understanding the tax implications can be overwhelming.
Selling mineral rights can lead to a substantial financial windfall, but it also opens the door to significant tax liabilities. Capital gains tax rates can be as high as 20%, depending on your income bracket and the length of time you've owned the rights. This tax burden can significantly reduce your profit margins.
However, there are ways to minimize this impact. One option is the IRS 1031 exchange—a tax deferment strategy that allows mineral owners to reinvest the proceeds from the sale of mineral rights into other qualifying properties, thus deferring income taxes.
IRS 1031 Exchange for Mineral Rights
The IRS 1031 exchange is a powerful tool for mineral rights owners. It allows you to defer paying capital gains taxes by reinvesting the proceeds from the sale into "like-kind" properties. But how exactly does this work for mineral rights transactions?
Firstly, it's crucial to understand what qualifies as "like-kind" properties. In real estate, this typically refers to the exchange of one type of real property for another. For mineral rights, the definition is broader, allowing for the exchange of various types of mineral interests, including oil, gas, and other subsurface minerals.
To initiate a 1031 exchange, you must identify and acquire a replacement property within specific time frames—typically 45 days to identify and 180 days to close. This ensures you comply with IRS regulations and successfully defer taxes.
Furthermore, specialized intermediaries known as Qualified Intermediaries (QIs) facilitate these transactions. They hold the sale proceeds in escrow until the replacement property is acquired, ensuring compliance with IRS rules.
Reading the Deed
Reading through the legal paperwork, to determine what you actually own, can be a daunting task.
The first step is acquiring the mineral rights deed form. If you do not have a deed, but own mineral rights, visit the Recorders office in the county where the acreage resides. This is the best place to search for the deed, or deeds. If you are unsure if you own mineral rights, you should also contact the county clerk in the county where you believe your minerals are located.
Deeds are written and arranged in a variety of different ways. Some are very specific, and others can be very vague. This presents challenges to mineral owners once they start reading the deed.
View a sample mineral deed here:
A Deed Decoded
To explain some common verbiage found in mineral and royalty deed forms, The LandGate team created a sample deed and decoded what is written.
The first paragraph of this mineral rights deed has all of the critical information. It answers all the “W” questions; who the seller is, who the buyer is, what minerals are being sold, where the minerals are located and when the sale will be effective.
If you are struggling with an overly complex or overly vague deed, just focus on finding two pieces of key information 1) name of Grantor/ Seller and 2) location of the property. With these two pieces of information, an industry professional will be able to find the rest of the information in the county public records.
For those looking in Denver, for example, check out this video by the County on how to search public records online.
If you are interested in selling or leasing mineral rights, LandGate can help. Mineral Owners can list their mineral rights for lease or for sale for free on our online marketplace. It starts by generating your free property report with lease and sale estimates on our map:
Types of Mineral Rights Ownership
The four main types of mineral rights ownership include severed mineral rights, leased mineral rights, fractional mineral rights, and overriding royalty interests.
1) Severed Mineral Rights
Mineral ownership can occur separately from surface land ownership, where one party owns the land and another owns the minerals beneath it. This scenario is referred to as severed mineral rights, and it is common in areas with significant oil and gas production. It allows landowners to sell mineral rights independently of the land, often leading to a more profitable arrangement.
2) Leased Mineral Rights
Mineral rights owners can lease their mineral rights for oil and gas exploration and extraction. Landowners receive payments, often in the form of royalties, which are a percentage of revenue from the minerals. This arrangement is advantageous for landowners who wish to retain ownership while still profiting from the minerals on their land. Key aspects to consider in such agreements include lease duration, royalty rates, and the terms of exploration and extraction.
3) Fractional Mineral Rights
Fractional mineral rights ownership refers to the partial ownership of mineral rights for a piece of land can occur through inheritance, sale, or other transfers where rights are divided among several parties. This situation can complicate management and sales, as all owners must agree on major decisions. However, it allows for shared risk and investment among multiple parties.
4) Overriding Royalty Interest
An overriding royalty interest (ORRI) is a portion of the proceeds from the sale of production. It is similar to a royalty interest but is not retained under the oil and gas lease. Instead, ORRI is granted, assigned, and created under a separate document. This involves the assignment of an Overriding Royalty Interest and the assignment of an Oil and Gas Lease, where the assignor retains an ORRI.
