Selling Mineral Rights

[Exponet]

Taxpayer called telling me he wants to sell his mineral rights and the tax consequences of the sale. He is selling these rights for approx. $200,000. I am having no luck on finding information on sale of mineral rights. Mind you this is not a lease but a sale. Things concerning me are:
1. Is this a capital gain?
2. Would there be a basis?
3. Capital gains changes for 2008?

Any information would be apprrciated.
Thanks

[taxxcpa]

Not sure, but....

Without researching it, I would assume that he owns both the land rights and mineral rights, and would further assume that he should allocate his basis in the property between the mineral rights and the land rights.

I need to research this in case I get some money from Chesapeake Energy. One of the neighbors (a fellow CPA) said all the land owners would be getting a check in October. If that is correct, I hope mine is a big one. However, I don't know if it will be a sale of mineral rights or some other type payment which would not be a capital gain.

[TaxLadyinPA]

What If

I'm not any help to your original question but I need to add another question to it.

What if the person sells the land but retains the mineral rights, then later decides to sell the mineral rights. First ... can that be done ? I should think yes ...

because there are people who have mineral rights passed down through the generations then when it is passed to them they decide they want to sell it to the land owner. Can they do that?

If so then . . .
I would think the basis would be zero and yes it would have capital gains.

[dmj4]

I would start....

If the mineral rights are that valuable, I would think mineral rights in the area would be valuable for other people, as well. I would begin with contacting people that are familiar with the mineral rights in the area. Sometimes, one thing leads to another.

In my opinion, it would be a capital gain and could/would have a basis. It depends on the value of those rights vs. the total basis at the time of the land was acquired.

In my very limited experience, the mineral rights are generally sold for a nominal amount if the buyer is only wanting the rights in case there is a higher future value. In my limited experience it is a per acre payment. $200K is more than a nominal amount unless the acerage is huge. Are they already drilling in the area?

This is only a starting place. To me, it is like anything else, you have to have enough documentation of how you came up with an amount to justify. If there is someone in the area capable of doing a backwards appraisal to determine a portion of the original basis that would be for the mineral rights, that is what I would do.

For me, determining if the original basis of the land is large enough for the portion that would have been mineral rights to make any difference would be my very first step.


I had an owner call today that sold tracts of land. They bought the land in 1958 for $32.49 per acre. If they had sold mineral rights and kept the land, I would not consider a portion of the original $32.49 per acre to be worth calculating an amount of that per acre for the mineral rights.

dmj4

[Lion]

When?

Was the land purchased with the mineral rights attached and specifically stated in the deed? Or, did the value develop after your client already owned the land with drilling or whatever producing results nearby? If the former, you can probably find his basis in the mineral rights on paper. If the latter, the basis might be zero. You certainly have to ask around in your area to see what the usual practice is. Start with real estate attorneys. Ask where the deeds are recorded, town clerks or whatever; if they've been in office for a long time, they would have a fount of knowledge in their memories.

[Burke]

If a company is offering $$$$ for mineral rights, you can be sure his is not the only property involved unless it is huge. It is a capital gain, reported on Sche D, and the sale would have a basis, allocated from the cost basis of the land orginally. If the rights are simply leased, then it is royalty income reported on Sche E. The owner retains the land and its surface rights. It may be years before anything is actually mined or extracted.

[Davc]

Royalties are based on production. You don't have royalty income if they're just locking up the right to drill or dig.