If you own mineral rights, the idea of leasing or selling those rights has probably crossed your mind at some point in time. You have probably received offer letters and phone calls, but you want to make the correct decision. Many mineral owners hesitate to take the plunge because of all the factors to consider. Maybe you feel it’s not the right time to sell, perhaps you are unsure what kind of taxes you’ll have to pay, or maybe you are not too sure about the process. We understand that making such a big decision is overwhelming. This article will help you answer some key questions and determine whether selling your mineral rights is right for you.
The Value of Mineral Rights
Various factors drive the decision to sell mineral rights. Some people are motivated by immediate monetary needs, some by planning for the future, and some by risk reduction.
Estate planning – Splitting up mineral rights or transferring mineral rights to your next of kin requires significant time, effort, and paperwork. If your heirs show little interest in mineral rights being passed on to them, selling your mineral rights might be the best route. Cash is easier to split up and will require less legal fees.
Tax advantages – Owning mineral rights could involve a variety of taxes, including income tax on royalty revenues, ad valorem tax on your property at the county level, and a severance tax depending on production. What if you could sell your mineral rights and pay no taxes? A 1031 exchange allows sellers to mitigate their tax exposure. Ask your accountant if this is the right avenue for you. For those interested, but do not have access to an accountant, we are happy to explain a 1031 exchange any time.
Volatility and risk reduction – Oil and natural gas values are particularly susceptible to fluctuations due to variations in supply and demand and other global economic conditions. Selling mineral rights might be the best option for owners and investors who do not have an appetite for high-risk investments or who do not wish to track the market’s ups and downs.
What should I consider in the decision-making process?
Assessing your short and long-term goals and monetary requirements will help you decide whether selling your oil mineral rights is the best choice.
Monetary needs – Do you have credit card debt to pay off? Will the extra money help pay for your child’s college? Is there a home renovation project you have been putting off? If selling your mineral rights allows you to meet your family’s needs, it might be worth pursuing.
Tax implications – Understanding the tax implications of selling your oil and mineral rights might help you decide whether it is the right choice. Income from oil and gas royalties is taxed as ordinary income. In most cases, this amount will be higher than the capital gains tax you will have to pay if you decide to sell your oil mineral rights. If you have inherited your mineral rights and are looking to sell them, you can opt for a step-up basis, meaning you will have to pay capital gains tax only on a portion of the sale price. Speak to a tax expert for more information on tax implications.
Convert mineral ownership to property ownership – Selling your mineral rights can give you the necessary resources to buy another property. You can choose a 1031 exchange and reduce your tax liability. However, it is essential to consult a tax expert to ensure that the new property you purchase falls under a 1031 exchange and that all the required paperwork is handled.
Selling part of your mineral rights – If you are unsure about parting with your mineral rights because of their sentimental value or because you do not have any pressing financial needs, consider selling only a portion. You could then use the sale money to invest in a less volatile asset and balance your portfolio.
What are the long-term consequences of selling mineral rights?
Avoiding volatility – Holding onto your mineral rights requires you to constantly monitor the volatile oil and natural gas market and ever-changing market prices. If you are averse to high-risk investments or prefer more hands-off investments, selling your mineral rights might be prudent, as well as using the money to reinvest, pay off debts, or fulfill a long-standing dream.
Diversification – For people whose mineral rights represent the majority of their non-liquid assets, selling the rights allows them to diversify and have a more balanced portfolio. They can consult a financial advisor on the best ways to split the income from the sale between multiple investments.
What are the advantages of selling oil mineral rights?
Selling your oil mineral rights offers many benefits, from having enough cash to take care of important responsibilities to chasing long-held dreams and reducing your risk exposure.
At Retama Minerals, our knowledge base and expertise enable us to extract the maximum value out of your mineral assets, something that individual mineral rights owners need help with. Eager to explore your options? Call us at (405) 306-4289 or fill in this form if you’d like one of our representatives to contact you.
