Are you interested in acquiring oil and gas royalty payments? Then you’ll need to know how you can get them. Oil and gas royalties are payments that a person or entity will receive. They will receive it if they own the mineral rights. Another way is if they assist in the extraction process of a piece of land. This land produces and sells valuable minerals. In this article, we will explain the two main kinds of oil and gas royalties. Additionally, learn how you can add them to your portfolio.

Royalties from Mineral Rights vs. Overriding Royalty Interests

There are two main kinds of oil and gas royalties: producing mineral rights and overriding royalty interests. The important difference to know between the two is that mineral rights ownership involves actually owning the subsurface of the land producing oil and gas, whereas overriding royalty interests are paid to people or entities that help produce the oil or gas itself.

How to Get Mineral Rights for Oil and Gas Royalties

There are three ways in which you can own mineral rights. You can buy mineral rights, inherit mineral rights, or receive them as a gift. If you purchase a plot of land in a fee simple estate, that means that you own your mineral (subsurface) rights in addition to your surface rights on which you can build. In some states, you may purchase the surface rights of a piece of land while another person or entity may already own the mineral rights below.

How to Receive Oil and Gas Royalty Payments from Mineral Rights

If you own mineral rights or a portion of a piece of land’s mineral rights, then you own a valuable asset. If that land has oil, gas, or another valuable substance extracted from its subsurface, then you will receive a portion of the profits when the minerals are sold. Usually, this comes in the form of a monthly payment. You can also sell your mineral rights as a way to earn a large lump sum.

How to Get Overriding Royalty Interests

You don’t own the mineral rights of a property? You can still earn oil and gas royalty payments in the form of an overriding royalty interest. Overriding royalty interests (ORRI’s) are also given a portion of the sale of extracted oil and gas, however, they are given to those assisting the in drilling and will disappear after the operation is over. ORRI’s are often given to geologists, brokers, landmen, and other people or entities that help bring minerals to the market.

Mineral rights are an extremely valuable asset to own in the United States.  Whether your mineral rights are currently producing oil and gas royalties or they have the potential to become a highly profitable extraction site, it is often difficult to make a decision as to should you sell your mineral rights or not.  In this article, we will define mineral rights and explore the benefits and drawbacks of selling your mineral rights.

 

What are Mineral Rights?

Mineral rights refer to the ownership of the subsurface of a property.  Mineral rights owners are entitled to accessing, extracting, and selling the resources below the surface of the Earth.  The surface rights owner can be entirely different than the mineral rights owner, which can be both one person, several people, or a larger entity.  The United States is one of the few countries in the world in which mineral rights can be bought or sold.

 

Should I Sell My Mineral Rights?

If you own producing mineral rights, then you are probably very familiar with the income owning mineral rights can provide.  Although you will no longer receive your monthly oil or gas royalty check, selling producing mineral rights can also be a great decision.

Perhaps you bought a fee simple estate in which you own both your surface rights and mineral rights, and someone has approached you with an offer to sell your mineral rights which are currently not producing.  In cases like this, there are also many pros and cons of selling your mineral rights.

 

Pros of Selling Mineral Rights

Selling mineral rights has the following advantages:

• Instant Cash Lumpsu in Your Pocket
• Less Taxes to be Paid Each Year
• Eligible for a 1031 Exchange

 

Cons of Selling Mineral Rights

Drawbacks of selling mineral rights include:

• No More Monthly Income (if your rights are producing)
• Loss of an Asset that Could Increase in Value

 

Alternatives to Selling Your Mineral Rights

If you are interested in earning money from your mineral rights but do not want to sell them, you can consider leasing your mineral rights to an oil and gas company.  In a mineral rights lease, you will still own the mineral rights of the property and may receive oil and gas royalties from the third party’s production.  Mineral rights can also be gifted or bequeathed to another individual or entity.

 

Conclusion

Ultimately, the decision of whether or not to sell mineral rights is up to the mineral rights owner. If you are considering selling your mineral rights, then it is always best to consult an expert to help you earn a fair price and ensure that you earn as much as possible off of the sale.

An oil, gas, or mineral lease is a legally binding agreement between the mineral rights owner and the company bringing the oil, gas, or mineral reserves to the market.  Agreements between landowners and oil companies date back to before 1900, though the process is still generally the same.  Knowing the details of an oil and gas lease is crucial before agreeing to anything that is legally binding.

What does a Standard Oil and Gas Lease Look Like?

Although this is a valid question, unfortunately when it comes to mineral leases:  there is no standard. Instead, they are made up of different clauses and sections.  Here are the parts of an oil and gas lease that are most common.

Dates Clause

The dates clause establishes the date, time, and primary term of the lease.  This is included in every mineral lease.

Parties Section

The parties section lists the names of all persons bound to the lease.

Consideration Section

Here, the legal terms of the lease are outlined and made enforceable to all parties the lease pertains to.

Granting Clause

The granting clause defines the property and purpose of the lease.  It then goes on to grant the use of the property to the lessee.

Royalty Clause

The royalty clause is very important to the lessor, or the mineral rights owner.  Here, the percentage of the proceeds of extraction is outlined for the amount and means of payment.

Drilling and Delay Rental Clause

This clause will allow the lessee to defer the immediate use of the property.  Delay rental fees are also under definition here.

Dry Hole, Cessation, and Continuous Drilling Clause

If the land is not found to contain minerals (aka a “dry hole”), this clause grants the lessee power to cease production.

Pooling Clause

This clause allows for the lessee to pool together multiple losses in order to form one larger drilling operation.

Surrender Clause

Here, the rights to surrender the lease are in definition for the lessee.

Damage Clause

Liabilities of the Lessee are in detail in the damage clause if any significant damage is present to the property.

Assignment Clause

The assignment clause protects both sides of the lease so that either party can transfer the rights or ownership of the property with the outlined notice.

Force Majeure Clause

In this clause, the lessee has protection from nonperformance in the declaration that the lease is by state and national laws.

Warranty Clause

The warranty Clause is important, as it guarantees rights to the land to the lessee if the lessor happens to default on mortgages, taxes, or other obligations causing them to forfeit their ownership.

Understanding property tax on mineral rights can be more confusing than many people expect. Mineral ownership can create questions about annual tax bills, appraisal notices, production value, and whether a non-producing interest is taxed differently from an active one. The answer often depends on where the property is located, how the interest is classified, and whether the minerals are producing income.

This guide explains the basics in plain language. It covers how property tax on mineral rights is commonly treated, how ad valorem tax on mineral rights works, why producing vs non-producing mineral rights taxes may be handled differently, and what can affect a mineral rights property tax assessment value. Because laws and appraisal methods vary by jurisdiction, this article is educational and should be used together with advice from qualified legal, tax, and valuation professionals.

Key Takeaways

• Property tax on mineral rights is usually a local or state-level property tax issue, not the same thing as federal income tax on royalty income.
• Ad valorem tax on mineral rights generally means a tax based on value, so the taxable amount often depends on appraised value, production, pricing assumptions, and local tax rates.
• Producing vs non-producing mineral rights taxes are often treated differently in practice because active production may create measurable taxable value that non-producing interests may not have to the same degree.
• A mineral rights property tax assessment value may be influenced by expected future income, commodity prices, decline curves, operating assumptions, ownership fraction, and local appraisal methods.
• Owning mineral rights may also involve other tax questions, including royalty income reporting, depletion, and possible sale-related tax treatment.

If you are trying to sort out what your ownership may be worth or how it may be viewed in the market, it can help to first understand the broader basics of what mineral rights are and how they differ from other property interests. If you would like to discuss a specific situation, you can also contact our team for a general conversation about mineral ownership and related considerations.

What are mineral rights?

Mineral rights are ownership rights in resources located below the surface of a property. In oil and gas contexts, those resources may include oil, natural gas, or other subsurface minerals. Mineral rights can sometimes be owned together with the surface, but they can also be severed and owned separately. That means one person may own the surface while another owns the subsurface mineral estate.

This distinction matters for taxes because mineral rights are a recognized property interest. Even though you cannot physically “visit” them in the same way you can walk across surface land, they may still carry taxable value depending on the jurisdiction, the type of interest, and whether the minerals are producing.

It is also important to distinguish a mineral interest from a royalty interest. In simple terms, a mineral owner may have the power to lease the minerals, while a royalty owner usually has a right to receive a share of production revenue under a lease. For a more detailed overview, see Ranger’s guide to oil and gas royalties.

Do you pay property tax on mineral rights?

In many jurisdictions, yes, property tax on mineral rights can apply. But the practical answer depends on several factors: whether the minerals are producing, how local law defines taxable property, whether there is a minimum-value exemption, and how the local appraisal authority calculates value.

That is why broad statements can be misleading. Some owners assume mineral rights are taxed exactly like a house or a vacant lot. Others assume non-surface ownership means no property tax applies at all. In reality, mineral interests are often handled under specialized property-tax rules, and those rules can differ meaningfully from one jurisdiction to another.

When people search for property tax on mineral rights, they are often really asking four different questions at once:

• Is my mineral interest taxable as property?
• When does production create taxable value?
• How is the assessed value calculated?
• Is this different from the taxes I pay on royalty income?

Those are the questions that matter most, and each deserves its own answer.

What is ad valorem tax on mineral rights?

Ad valorem tax on mineral rights is a value-based property tax. “Ad valorem” generally means “according to value.” In practical terms, that means the tax is not usually based on a flat fee. Instead, the tax is tied to an assessed or appraised value assigned to the mineral interest.

That is one reason tax bills can change from year to year. If prices rise, production improves, or the appraisal authority updates assumptions used to estimate future value, the taxable amount may change even when ownership does not. Likewise, if production declines or a well’s economic life shortens, the assessed value may fall.

Because many owners use “property tax” and “ad valorem tax” interchangeably, it helps to be precise. In many oil and gas discussions, ad valorem tax on mineral rights refers to the property-tax side of mineral ownership. That is separate from federal income tax on royalty checks and separate from production-related taxes imposed on extracted resources.

Property tax on mineral rights versus income tax and severance tax

One of the most common points of confusion is the difference between property tax and other taxes connected to oil and gas interests.

Property tax

Property tax on mineral rights is generally tied to the value of the ownership interest itself. It is usually handled at the state or local level through an appraisal and billing process.

Income tax

Income tax is different. If you receive royalty income, that income may be taxable for federal income-tax purposes. Depending on the nature of the interest and the activity, reporting may occur on different forms, and depletion may also become relevant.

Severance or production tax

Severance tax generally relates to the extraction of natural resources from the ground. It is not the same thing as local property tax, even though both can appear in the broader economics of a producing property.

Keeping those categories separate can prevent costly misunderstandings. A person can owe taxes connected to mineral ownership without all of those taxes being the same type.

Producing vs non-producing mineral rights taxes

The distinction between producing vs non-producing mineral rights taxes is one of the most important parts of this topic.

Producing mineral rights are tied to active production. If a well is producing and revenue is being generated, the appraisal authority may have a clearer basis for estimating the value of the mineral interest. In many areas, active production makes it easier to assign taxable value because there is observable output, pricing data, and a basis for forecasting future income.

Non-producing mineral rights are different. A non-producing interest may still be valuable, but its value can be more uncertain because there is no current production to anchor the analysis. In some jurisdictions, non-producing interests may carry little or no separately assessed taxable value, while in others they may still be considered in a broader valuation framework.

This is why the phrase producing vs non-producing mineral rights taxes matters so much. It is not just a technical distinction. It affects whether an owner receives a separate mineral appraisal, how aggressive a valuation may be, and whether the local authority sees current economic value in the interest.

If you are unsure how your rights relate to the surface estate, Ranger also has a guide comparing surface rights and mineral rights.

How mineral rights property tax assessment value is often determined

A mineral rights property tax assessment value is often based on one central question: what is the mineral interest worth for tax purposes under the rules used by the applicable appraisal authority?

That sounds simple, but the answer can involve many variables, especially for producing oil and gas interests. Depending on the jurisdiction, appraisal professionals may consider:

• historical production levels
• estimated future production
• commodity price assumptions
• decline rates
• remaining economic life of the well
• ownership fraction
• lease burdens and royalty terms
• allowed expenses or discount factors
• market evidence and local appraisal standards

For producing properties, the result is often some form of discounted future income estimate or other value model designed to reflect fair market value under local rules. That is why a mineral rights property tax assessment value can change significantly when pricing, production, or reserve expectations change.

For non-producing interests, the analysis may be more limited or more speculative. In some places, there may be little taxable value assigned until a lease, permit, development program, or actual production creates stronger evidence of economic value.

This also helps explain why neighbors can receive different outcomes. Two people may own mineral rights in the same county, but one interest may be tied to active wells while the other is undeveloped acreage. The tax treatment may not look the same.

If you are evaluating a tax notice and trying to understand whether the market view of your interest is realistic, you may want to contact our team to discuss the ownership context, production profile, and how buyers often think about mineral value.

Why assessment notices can surprise owners

Many owners first focus on taxes only after receiving an appraisal notice or annual bill that seems higher than expected. That surprise usually comes from one of a few causes.

First, the owner may not realize the interest is now producing. Once production begins, a mineral interest may move from being largely theoretical to having measurable economic output. That shift can affect property tax on mineral rights quickly.

Second, the owner may not realize how much a local authority relies on pricing and projected future income. If commodity prices or well performance improve, the value assigned to the minerals may increase even if the owner has not bought or sold anything.

Third, the owner may be comparing property tax to royalty cash flow without separating them conceptually. A good year for royalties can also correspond with a higher value-based tax assessment.

Does a small mineral interest get taxed?

Sometimes not, but this is exactly where jurisdiction-specific rules matter. Some states or local tax systems provide minimum-value exemptions or administrative thresholds. Texas, for example, has a statutory exemption for certain mineral interests below a specified value threshold, but that should be read as a state-specific rule rather than a universal national rule.

Small interests can also be affected by how value is aggregated, how local billing systems handle de minimis amounts, and whether the interest is producing. That is one reason owners of fractional interests should not assume that a tiny percentage automatically means no tax. A small fraction in a valuable producing well can still create meaningful taxable value.

How ownership fraction affects property tax on mineral rights

Fractional ownership is common in the mineral world. Families inherit partial interests. Estates get divided among heirs. Acreage can be split across different tracts, leases, and wells. Because of that, property tax on mineral rights is often tied not only to the property itself but also to the exact fraction you own.

For example, if a producing well has taxable value and you own only a small decimal interest, your share of that value may be much smaller than the whole property value. But the math can still become complicated if there are multiple wells, multiple tracts, or different lease burdens involved.

This is also why owners should pay close attention to division orders, ownership schedules, and appraisal records. A mistake in decimal ownership can affect both revenue and taxes.

How this topic connects to royalty income

Another common question is whether the same mineral interest can create both property tax and income tax consequences. The answer is often yes. A producing interest can generate royalty income, and that income can have federal tax implications. At the same time, the underlying property interest may have a local ad valorem or property-tax value.

That does not mean owners are being taxed twice in the same way. It means different tax systems may apply to different aspects of ownership. One system may tax income received. Another may tax the value of the property interest. Yet another may tax resource extraction at the state level.

Understanding those layers can make tax planning less stressful and can reduce confusion when documents arrive from operators, appraisal districts, and tax preparers at different times of year.

Common mistakes owners make

• Assuming mineral rights are never subject to property tax because they are underground.
• Assuming all non-producing interests are tax-free in every jurisdiction.
• Confusing ad valorem tax on mineral rights with federal income tax on royalties.
• Ignoring an appraisal notice because the ownership percentage seems too small to matter.
• Failing to verify the decimal ownership used in the assessment.
• Not reviewing whether the mineral rights property tax assessment value appears consistent with actual production and market conditions.

What to review if you receive a mineral tax notice

If you receive a notice related to property tax on mineral rights, review the following items carefully:

• the exact owner name shown on the notice
• the legal description or property reference
• the producing wells or tracts tied to the assessment
• the ownership fraction or decimal interest used
• the assessed or appraised value
• the deadline to question or protest the value
• whether the notice relates to property value, income, or another tax category

If the notice appears inconsistent with the ownership records or the economics of the property, it may be worth speaking with legal, tax, or valuation professionals promptly. Deadlines matter.

Why clarity matters before selling or evaluating mineral rights

Taxes are only one part of the ownership picture, but they matter because they affect net value, expectations, and planning. An owner who understands producing vs non-producing mineral rights taxes and how a mineral rights property tax assessment value may be derived is usually in a better position to evaluate offers, organize records, and ask informed questions.

Tax clarity also helps when families inherit mineral interests and are trying to understand what they own. Inherited minerals often come with incomplete records, old lease files, and uncertainty about whether the rights are active, producing, leased, or dormant.

Final thoughts on property tax on mineral rights

Property tax on mineral rights is a real issue for many owners, but it is not a one-size-fits-all subject. Whether tax applies, how much is due, and how the value is calculated can depend on production status, ownership fraction, local appraisal practice, and state law. That is why broad assumptions can lead to mistakes.

If there is one point to remember, it is this: property tax on mineral rights is usually about value, classification, and jurisdiction. The more clearly you understand the difference between ad valorem tax on mineral rights, royalty income tax, and producing vs non-producing mineral rights taxes, the easier it becomes to interpret notices, talk with professionals, and make informed decisions.

When questions arise about ownership, valuation context, or how a buyer may view your assets, contact our team today to start the conversation.

Fee simple ownership is most commonly referenced today when purchasing new real estate.  Fee simple is a legal term and is the most common and absolute type of property ownership in the United States.  If you are buying land or looking to sell, lease, or purchase mineral rights, understanding fee simple ownership is crucial.

What does Fee Simple Ownership include?

Fee simple ownership encompasses an entire personal estate.  By owning a fee simple estate, the property owner has control over the surface rights, subsurface rights, as well as the rights to the air above the property.  Each of these rights (or all of them together) can then be sold, gifted or bequeathed to another individual or entity by the property owner.  In some states, it is also possible to lease the surface or mineral rights of a property for an extended period of time.

Who Can Own a Fee Simple Estate?

In most of the world, any resources found beneath the Earth’s surface belong to the government in which the land resides.  The United States is one of the few unique countries in which fee simple ownership is possible, as property owners have the ability to own their subsurface and mineral rights. Owners of single-family residences most commonly have a fee simple estate, whereas those who share land or space, such as in apartments or townhomes, rarely have fee simple estates.

Owning Surface Rights Without Mineral Rights

It is entirely possible to purchase land without a fee simple estate.  In some cases, the mineral rights of a property are owned entirely by a different person than the surface rights.  In this scenario, you can still purchase the surface rights in order to build and live in a home on the property, however, you will not own the minerals below the surface of your land.  Although the law varies from state to state, you may be entitled to compensation for damages to your property’s surface through the extraction of minerals.