Some of mineral owners most often asked questions are regarding taxes. As with any question regarding taxes, there is not a simple answer. Land owners who own mineral rights can make money in many ways. From lease bonuses to royalty payments, or even by selling their mineral rights. 

However, money earned from mineral rights — through royalties, lease bonuses, or selling mineral rights — is taxed at the federal and state level. This article discusses how mineral rights are taxed and how to manage and minimize this taxation. 

Reporting Mineral Rights on Your Taxes 

Understanding the tax implications of mineral rights can be difficult. Taxpayers need to understand how and where to report mineral rights on their tax return to avoid potential penalties. It is advisable to use an accountant or tax advisor with expertise in mineral rights. 

Taxes on mineral rights generally fall into four categories, and can be payable at federal and/or state level: 

• Property taxes: Taxes levied on landowners, sometimes determined by a property tax assessor 

• Income taxes: Taxes on income from mineral rights such as royalty payments and lease bonuses 

• Capital gains taxes: Taxes on the full or partial sale of mineral rights 

• Severance taxes: State taxes on the sale of extracted minerals to buyers 

State Mineral Rights Taxes in Texas and Oklahoma 

While everyone has to pay federal income and capital gains tax, landowners in Texas do not have to pay any state income or capital gains tax. Landowners in Oklahoma do have to pay these taxes, but they are progressive (meaning only the highest earners pay the highest rates). 

On the other hand, Texas collects property taxes from mineral rights holders who are paid royalties (i.e. those whose land is actively producing), but the rates are typically low. If you have mineral rights in Texas, your county should tell you how much property tax you owe based on what the operators report. 

In both states, you may have to pay a share of severance tax if the minerals are produced on your property. But certain wells and low-producing land may be exempt from severance taxes. 

Taxes on Mineral Rights Lease 

Landowners who lease mineral rights to an operator generally have to pay income tax on the money they earn from the operator. This may include royalty payments, lease bonuses, and other payments. These payments are stated on the 1099-MISC form that the operator sends you and must be reported on Schedule E of your federal return. 

According to the IRS, leases and lease bonuses should be reported as “rent” on your Schedule E, while royalties should be reported as “royalty income.” 

Since these payments are considered ordinary income, taxpayers will pay income tax based on their combined work income, mineral rights income, and other types of income they receive. Mineral rights lease payments could therefore move you into a higher tax bracket. 

Taxes on Mineral Rights Sale 

Selling your mineral rights means you may have to pay capital gains tax, which is calculated in a different way to income tax. 

Factors that affect your capital gains tax bill include the sale amount, your “basis” in the rights (determined by how much you paid for them or their market value when you inherited them), the length of time you held the mineral rights before selling, and your income tax bracket. 

Sale of mineral rights results in capital gains tax if you have owned the rights for more than a year. If you have owned the rights for less than a year, it is subject to income tax instead (at a higher rate). So, it is generally better to hold onto mineral rights for at least a year before selling.  

Taxes on Mineral Rights Inheritance 

Many landowners inherit mineral rights from deceased relatives. When this happens, the person inheriting mineral rights may have to pay estate tax, which ranges from 18% to 40%. However, as of 2024, inheritors don’t pay any federal estate tax if the value of the inheritance is less than $13.61 million. Furthermore, there is no state-level estate tax in Texas or Oklahoma. 

When inheriting mineral rights, you should get a professional assessment of the market value of the rights, as this can help you pay fewer capital gains taxes if you eventually sell your mineral rights. (This type of calculation is known as “step-up.”) 

Reducing Your Mineral Rights Tax Bill 

Whether you are leasing or selling your mineral rights, you can reduce your mineral rights taxes through deductions and expenses. Some routes include: 

• Depletion allowance: Mineral deposits are not infinite, so each year that an operator extracts resources from your property, the property becomes less valuable. They are technically a “wasting asset.” The depletion allowance is a federal income tax deduction for mineral rights lessors that deducts a percentage of income tax because of this. 

• 1031 exchange: You can defer your capital gains tax liability when selling mineral rights using a 1031 exchange. This is when you re-invest the money you receive in a “like-kind” property such as other mineral rights. In some cases, surface-level real estate may qualify as a like-kind property. 

• Various expenses and deductions: You can reduce your mineral rights tax burden via charitable giving, attorney fees, retirement plans, and other means. A tax advisor may suggest the best routes depending on your situation.  

Mineral rights holders should consider the tax implications of leasing, inheriting, and selling their mineral rights. However, even factoring in taxes, selling your mineral rights can generate a large windfall. 

Are you considering selling your mineral rights? Retama Minerals may be interested in buying your rights. Fill out our two-minute form to see how much you could earn.