How Does Selling My Mineral Rights Affect My Taxes?

No one really likes to think about taxes, but they are an undeniable part of life. So when you’re considering selling your mineral rights, how that sale will impact you at tax time is something you definitely want to keep in mind.

Now here’s the good news: There may be some tax benefits to selling your mineral rights, depending on your specific situation.

Tax benefits of selling your mineral rights

For landowners, there can be a couple of key tax-saving opportunities to selling your mineral rights. They include:

Qualifying for the long-term capital gains tax rate

When a landowner receives royalty payments from an oil company or gets a leasing bonus, that money is taxed by the government at the landowner’s standard income tax rate (based on which tax bracket you fall into). So the same rate that you get taxed on for money you earn at your job is the rate you get taxed for any money you see from drilling leases or royalties.

On the other hand, when a landowner sells his or her mineral rights the income earned from that sale is in many cases eligible for the long-term capital gains tax. This tax rate is lower than the standard income tax rate. Depending on how much you sell your mineral rights for, taking advantage of this reduced tax can mean more money in your pocket.

Here’s what long-term capital gains tax rates look like compared to standard income tax rates in 2018:

Individuals in the lowest two income brackets (paying rates of 10% or 12%) pay a 0% long-term capital gains tax rate

Individuals in the middle four income tax brackets (paying rates from 22-35%) pay a 15% long-term capital gains tax rate

Individuals in the highest income tax rate bracket (37%) pay a 20% long-term capital gains tax rate

As you can see from those numbers, the long-term capital gains tax rate you may pay for sale of your mineral rights is significantly lower than the standard rate you would probably pay for your royalties or bonuses. With the long-term capital gains tax rate, you might be paying 50% less on taxes from your mineral rights sale than you would with the standard income tax rate. That adds up!

Who qualifies for the long-term capital gains tax?

To qualify for the long-term capital gains tax when you sell your mineral rights, you must have owned the mineral rights for more than one year prior to making the sale (which, in most cases, means you’ve owned the property for more than a year). Most homeowners who sell their mineral rights qualify for the long-term capital gains tax.

Deferring taxes with a 1031 like-kind exchange

There’s also another scenario that’s applicable to some landowners (though not as many as the long-term capital gains tax) where you can defer paying any taxes on the profits from the sale of your mineral rights through what’s called a “qualifying like-kind exchange” under IRS Code Section 1031.

In this scenario you could invest your profits from selling your mineral rights in another, “similar” piece of real estate (like another home or a vacation home). By taking this action, a 1031 Like-Kind Exchange could allow the tax on profits from the sale of your mineral rights to be deferred until the newly acquired home is sold in the future.

This bit of tax code is often used by real estate investors to enable them to continually invest in more properties without being weighed down by taxes. It can be complex and confusing to navigate (and there are specific timelines you need to follow), so it’s definitely something you want to speak with a tax professional about before making any moves or decisions.

Always consult with a CPA to get expert tax advice

If you’re thinking about selling your mineral rights, consulting with a certified public accountant (CPA) first is always a good idea. These individuals can give you expert advice on whether the tax benefits mentioned above will apply to your situation and, if so, how you can take advantage of them.

If and when you decide to sell your mineral rights, be sure to keep taxes in mind. Talk to a tax professional so you can make sure you’re taking the appropriate actions to maximize the amount of money that goes in your pocket. Taxes may be an inevitable part of life, but they don’t always have to be quite so taxing.

Are you a landowner considering selling your mineral rights or royalties? We can help answer your questions. Reach out to Gateway today and let’s start a conversation.