Inheriting mineral rights and royalties can be an unexpected surprise and in some cases, an unexpected financial boon. However, there are responsibilities heirs should be aware of to be able to master the habits of responsible mineral rights ownership. If you have inherited minerals and royalties, or are considering passing down interests to your heirs, this article will help you to understand what to expect and how to manage your interests effectively from the start.
What Are Mineral Rights and Royalties?
Mineral rights give landowners the contractual ownership of the subsurface minerals (like oil, gas, or coal) beneath their property. When companies extract these resources, owners may receive royalties—a percentage of the revenue generated, based on their mineral ownership percentage. While there are many factors that determine whether these interests can provide a valuable income stream over time, not all inherited interests will be produced and therefore no monthly royalties will be distributed.
Key Steps to Take After Inheriting Mineral Rights
- Gather All Documents: Collect all paperwork regarding your new mineral rights ownership, including deeds, title and conveyance documents, revenue statements, family tree information, etc.
- Seek Professional Assistance: A mineral rights professional Landman that is an expert in the location where your interests are located is the best, and most economical resource that can assist with your newly inherited assets. They will know of oil and gas activity happening in the area where your interests are located, can perform due diligence, and advise on next steps.
- Keep an Open Mind: Treating your interests as an investment and not as a family heirloom is the most important thing to remember. Interest owners of the old “never sell your minerals” mindset are risking losing out on a possible one time, lottery-style financial windfall. Holding onto your minerals when they are in the perfect stage to sell is something you definitely want to avoid.
The best time to sell minerals is something you will want to know and take advantage of. When selling minerals, timing is everything and the opportunity may not come again for a very long time, if at all.
Know the Tax Implications for Heirs
It may come as quite a surprise to new mineral and royalty owners that if their interests are producing, meaning they have started to receive monthly royalty checks, they will have to pay income and property taxes on them. If they sell some, or all of their interests, they will also be taxed on the sale of the assets.
The tax rate will depend on how long the interests were owned before they were sold. Minerals and royalties are treated exactly the same as real estate so they can expect to either be taxed at the optimal capital gains rate if they owned them for more than one year before they sold them, or at the ordinary income tax rate, which is not so good, if they owned them for less than one year and sold them within that year.
Read further to learn about the importance of a Retrospective Appraisal and how it can also reduce your tax liability when inherited interests are sold.
Sell or Keep Inherited Mineral Rights?
Deciding whether to keep or sell your inherited interests is a personal choice. The following are some of the most important things to consider that can help aid in your decision.
First, know that it’s not necessary to sell all of your interests. Many of my clients choose to sell only a portion of them, thereby retaining mineral and royalty ownership and also gaining financial rewards when selling the portion they choose.
Second, consider the aforementioned tax responsibilities required to be paid if your inherited interests are producing. This includes annual property and school taxes where your minerals are located.
Managing minerals also takes time and consistent awareness of the activity surrounding your interests. Ensuring you are being paid correctly also takes a considerable amount of industry knowledge, including Understanding the Difference Between Net Mineral Acres and Net Royalty Acres.
Having an understanding of the oil and gas development stages of production is also an excellent way to help aid your decision, especially when it comes to selling your interests.
Valuation of Mineral Rights
The process of determining the mineral rights value of inherited interests is much the same as determining their current value. At Venergy, we believe the best way to determine how much minerals are worth is to find out what mineral buyers are willing to pay for it.
Read more about how and why here.
However, heirs need to understand the importance of determining the value of their assets at the time of their inheritance. This is a task they do not want to overlook if they plan to sell some, or all of their interests, or have sold already. This value can be calculated with a Retrospective Appraisal.
Retrospective Appraisals are needed for those who have inherited their interests and plan to sell them in the future, or have sold them. The primary reason to get a Retrospective Appraisal is to reduce the tax obligations for when they are/were sold. Knowing the value of your interests at the time of inheritance will determine the amount in taxes you will pay. This is called your basis. If you do not obtain this value with a Retrospective Appraisal, and instead use the value that you sold them for, your taxes owed are likely to be much, much higher.
Venergy specializes in Retrospective Appraisals to assist clients with reducing their tax liabilities on inherited interests.
Venergy Can Help with Inherited Mineral Rights
Managing inherited interests can seem daunting, but it doesn’t have to be. Becoming educated on what to expect, avoiding common pitfalls, and seeking the right guidance on your newly inherited assets will help you make confident decisions about what to do with them.
Read our 5-star Google reviews, client testimonials, and contact us if you need assistance. We’re here to help.
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