A Guide to Selling Mineral Rights
If you own mineral rights, then you may be able to sell them to a buyer interested in extracting oil, gas, or other minerals from beneath your property. Selling mineral rights can be done independently of surface rights in what is known as a “split estate.” On the other hand, mineral rights and surface rights are also commonly bundled together in a “fee simple estate,” which is the highest form of property ownership in the United States.
No matter how, when, or where you decide to sell your mineral rights, there are certainly a lot of things to consider and many questions tend to arise. For this reason, we’ve put together this complete guide to selling mineral rights. In this article, we will explore everything there is to know about selling mineral rights in the United States.
Is It Better to Sell or Lease Mineral Rights?
If there is oil, gas, or other valuable minerals below your property, then there are essentially two different ways to earn an income from the extraction and sale of the resources: selling or leasing your mineral rights. Selling your mineral rights is pretty straightforward, whereas leasing your mineral rights can be a bit more complicated.
In an oil and gas lease, mineral rights owners retain ownership of the mineral rights, while signing an agreement with an oil and gas company to “lease” the property’s subsurface. Essentially, leasing your mineral rights is like renting out the space below your property’s surface in exchange for a percentage share of everything they can extract and sell.
Pros and Cons of Leasing Mineral Rights
Here are the main advantages of leasing mineral rights:
- Retaining Ownership of Mineral Rights
- Earning Royalty Payments from an Oil and Gas Lease
- Only Committed to Terms of 3 to 5 Years
Conversely, here the main disadvantages of leasing mineral rights:
- No Guaranteed Income if Gas or Oil is not Sold
- Quick Depletion of Property Value
- May Enter into Unfavorable Lease Conditions Unknowingly
Pros and Cons of Selling Mineral Rights
Here are the main benefits of selling mineral rights:
- A Sale is Based on Land’s Potential, Not Amount of Minerals Found
- Payment is Made as a Large Sum of Money at the Time of Sale
- Proceeds are Eligible for 1031 Exchanges
On the other hand, here are the cons of selling mineral rights:
- Loss of an Asset that May Increase in Value
- Missing out on Potential Oil and Gas Royalties
Read more about the pros and cons of selling.
Ultimately, the choice between selling your mineral rights or leasing your property’s subsurface is largely driven by individual factors for any given property. Whereas both types of agreements come with different forms of risk, overall, selling mineral rights is the better way to receive a large initial capital payment.
Learn more about selling or leasing your mineral rights.
What to Know Before you Sell Your Mineral Rights
So if a large amount of guaranteed income sounds good to you, then surely selling your mineral rights is going to be a great way to do so. Of course, there are many things to know before you sell your mineral rights in order to ensure the best possible conditions for everyone at stake.
More than anything sellers should be familiar with:
- The Exact Assets Outlined in the Negotiation
- An Approximate Value of the Mineral Rights Worth
- Common Red Flags from Shady Buyers
Essentially, it is good to become as familiar as possible with your property, its value, and general industry trends. Shady sellers may attempt to use confusing jargon or vague terms in order to win over advantages in a mineral rights sale. However, if you have received multiple offers, then you may have a better understanding of your property’s worth.
Reading more about what to know before selling.
How Much Should I Sell My Mineral Rights For?
To answer this question simply, it is easy to say this: sell your mineral rights for as much as you can. That’s it, simply go with the highest bidder. Although there are many ways to calculate the approximate value of your mineral rights, in truth, they are only going to be as valuable as someone is willing to pay.
Before entering into negotiations, you may also want to consider having an appraisal for your mineral rights. Third-party industry experts may be able to look at your property, industry trends, and more in order to give you a rough fair market value for your mineral rights.
Above all, the value of your mineral rights will largely be determined by the following factors:
- Producing vs. Non-Producing Mineral Rights
- Property History & Existing Wells
- Property Size and Location
- Adjacent Oil or Gas Drilling Operations
- Current Market Price of Resource
Look further into how much you should sell your mineral rights for.
What Happens When you Sell Your Mineral Rights?
If you’re considering selling your mineral rights, then you may be wondering what exactly needs to happen in order to successfully benefit from the sale. No matter who you sell your mineral rights to, the post-sale process is largely the same nationwide.
First, you will receive your compensation. What’s great about selling mineral rights is that it is usually associated with a large lump sum. Next, you will have to file the correct tax information. Here, it is recommended that you speak to a CPA to ensure that you are not paying too much tax from the sale of the mineral rights. If you’ve owned your mineral rights for over a year, you may be able to qualify for a long-term capital gains tax.
If you’re using your mineral rights sale in order to finance another, similar asset, then you may want to consider utilizing a 1031 exchange for the maximum tax advantages. We’ve outlined some more information on this below.
Learn more about what happens when you sell your mineral rights.
1031 Exchange & Mineral Rights – Deferring Capital Gains Taxes
A 1031 Exchange is an IRS-approved method for deferring capital gains taxes on the sale of large assets. Ordinarily, if you were to sell your mineral rights, then you would have to pay capital gains tax from the sale of your asset. With a 1031 Exchange, you are able to apply the sale of your mineral rights directly to the purchase of a similar asset, without having to pay taxes on the original sale. Thus, you are able to save money by using it tax-free.
In order to qualify for a 1031 exchange, there are 4 main requirements that must be met. They are as follows:
- The taxpayer who sells must be the same who buys the new property.
- The must property must be identified within 45 days of the mineral rights sale.
- The new property must be purchased within 180 days of the mineral rights sale.
- The new property must be of equal or greater value of the sale.
Furthermore, normal hold times and related party transactions must be met in order to qualify a mineral rights sale for a 1031 exchange. Read more about 1031 Exchanges.
How to Use a 1031 Exchange with Mineral Rights
Mineral rights sales are recognized as fairly normal property sales. Therefore, a 1031 exchange can be used to avoid capital gains tax in upgrading to a number of different kinds of properties. Most commonly, mineral rights sellers will use a 1031 exchange to purchase:
- Land & Property
- Other Mineral & Water Rights
- And More
In order to use a 1031 exchange, a mineral rights transaction must meet all of the qualifications as outlined above. The seller must obtain all of the necessary paperwork from the IRS and fill out the forms along with the transaction’s timelines.
Learn more about how to set up a 1031 exchange.