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Advantages of Selling Your Oil and Gas Mineral Rights and Royalties

Night Sky With Oil Wells on the Horizon

It is rightly assumed that having oil and gas mineral rights is a stroke of exceptional luck. It can be. If oil or gas is found on a person's property -- or someone inherits mineral rights, -- the capital potentially gained can be lucrative. However, owning oil and gas mineral rights are not always as promising as a person might expect.

In fact, mineral rights can be expensive.

Primary Factor Limiting Royalties Potential: Lack of Control

Lack of control is the principal reason mineral rights and royalties can be a financial burden as opposed to generating money.

As most people do not have the money required to finance their own drilling --nor their own delivery system -- the majority of those who own mineral rights royalties are at the prerogative of oil and gas companies.

To begin with, just because an oil company leases a property does not necessarily mean the company is obligated to drill. If a company decides drilling and transporting the oil or gas beneath the surface of a property it has leased, the company can simply sit on the property and wait until the market value of oil or gas reaches a level that will promise a return on investment.

That means the owner of the mineral rights will receive no royalties.

In many cases, selling mineral rights have distinct advantages over maintaining ownership.

Taxation can be Steep

People receiving oil or gas royalties income must pay federal income tax on the royalty revenues they earn each year, a state severance tax on those earnings, as well as a county ad valorem tax.

While the amount of each tax varies from state to state and county to county, royalties income is not always what a person might expect.

And, even if a property isn't producing oil or gas, property tax payments to the federal, state and county governments are still required.

A person's lack of control and the taxes the person is obligated to pay, means there are distinct advantages to selling one's mineral rights.

Single Lump Sum

The riskiest component of mineral rights is that there is no guarantee of future royalties. If oil or gas prices drop, the oil or gas company may pull the plug on a well and simply allow it to remain dormant.

Additionally, royalties are a percentage of the total profit made from the oil or gas pumped from a well, generally between 12.5 and 25 percent. That means, while there is the potential for long-term income, there is no guarantee.

Furthermore, there is no large payout at the end. Selling mineral rights means a single, lump-sum payment.

Lower Taxes

It is possible to sell mineral rights and pay no taxes. The federal government allows for, under the 10-31 Like Kind Exchanges Code, a person to sell their land and mineral rights and pay no taxes if they purchase a like-kind property.

And, even if a person does not buy a like-kind property, that person no longer has the tax burden associated with the property.

While there are dozens of other benefits to selling mineral rights -- property management time and costs, not only paying federal, state and county taxes, but also paying large sums to file the taxes and lack of income from well-less properties or non-producing wells are all potential financial burdens -- a lump sum of money and lower taxes are the two biggest advantages of selling mineral rights.

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