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timeline for 1031 exchange

Timeline for 1031 Exchange | How to Set Up a 1031 Exchange with Mineral Rights

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Owning property is one of the best ways to increase your equity and net worth. As some people know, mineral rights can be one of the most valuable assets in your portfolio. For those selling mineral rights, here’s the timeline for 1031 exchange and how to set it up to maximize your investment.

What is a 1031 Exchange?

A 1031 exchange gets its name as it is written in section 1031 of the IRS code.

For those who haven’t had the pleasure of reading the code, it defines a 1031 exchange as the ability to defer capital gains tax on the sale of a property when another “like-kind property” is purchased.

What is a 1031 Like-Kind Exchange Property for Mineral Rights Sales?

So basically, if you sell your mineral rights, you will not have to pay capital gains tax so long as you reinvest in something similar of equal or greater value. In the eyes of the IRS, “like-kind” properties eligible for a 1031 exchange after the sale of mineral rights include:

  • Property
  • Businesses
  • Farms
  • Artwork
  • Livestock
  • Mineral & Water Rights
  • And More.

Qualifications to Use a 1031 Exchange with Mineral Rights

In order to know how to set up a 1031 exchange with mineral rights, there are a few other important aspects of your transactions that must be accurate. Most commonly:

  1. The new property must be under the same taxpayer name as the mineral rights.
  2. After 45 days, the property owner must identify up to 3 potentially like-kind properties, or more than 4 if the total property values do not exceed 200% of the mineral right sale
  3. The new property must be purchased in <180 days after the sale of the mineral rights.

Conclusion

Ultimately, using a 1031 exchange can help you get the most benefit from selling your mineral rights. Just take into consideration the timeline for 1031 exchange. Instead of paying a hefty capital gains tax on the sale of your property’s subsurface, you can reinvest into something new. As you’ve learned from your recent sale, mineral rights can be extremely valuable, so perhaps you will reinvest even more into oil and gas production.

If you have further questions, feel free to reach out to us here.

leasing-mineral-rights

Leasing Mineral Rights: Pros and Cons

If you own the resources below your property’s surface, then you may be inclined to monetize your asset. With mineral rights, the two most common ways for people to turn their property into a paycheck are selling or leasing mineral rights. In this article, we are going to highlight the advantages and disadvantages of oil and gas lease agreements.

Pros of Leasing Mineral Rights

Oil and gas companies often approach property owners with a contract in hopes to “lease” the land’s mineral rights. If you sign on the bottom line, there are a few great benefits.

Retaining Ownership of your Mineral Rights

In leasing mineral rights, the mineral rights holder is still technically the property owner, as the oil and gas company is essentially renting it. Once the lease expires, everything will go back to normal or the contract can be renewed.

Potential Cash Flow Opportunity with Mineral Rights Royalties

Whenever an oil and gas company is able to extract and sell oil or gas from your property, then you will earn a percentage share of that sale. The amount that you will receive is based on the current price of the resource as well as the percentage ownership as defined in your contract.

Signing Bonuses

Additionally, you may not have to wait until the drillers strike oil to put some money in your pockets. Many oil and gas leases include a signing bonus for the property owner to enjoy immediately.

Cons of Leasing Mineral Rights

Of course, there are also some downsides to leasing mineral rights. Choosing to lease, rather than sell your mineral rights comes with a few potentially costly consequences.

Highly Variable Payouts

Sometimes, you may not find any oil or gas on your property. Other times, the company slated to drill on your land may go bankrupt or simply lose interest in the project. All too often, oil and gas leases become dormant and property owners are unable to reap the benefits.

May Miss Out on Opportunity to Sell Mineral Rights

On the other hand, an extended oil and gas lease may deplete the resources below your property entirely. Depending on the terms of your lease agreement, this may turn out to be a lesser opportunity than outright selling your mineral rights. If you extract all of the oil or gas from your property under a bad mineral rights lease, then you may be missing out on earning a potentially large lump sum from selling your property.

Entering Into a Complicated Agreement

Lastly, leasing mineral rights is complicated. They are not required to be made public record and no two are alike. Whereas the sale of mineral rights is a bit more black and white, leasing mineral rights can be extremely complicated. It is always best to consult a professional before leasing your mineral rights.

mineral-rights-101

Mineral Rights 101: A Guide to Everything that You Own Below Your Property

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If you bought your property in a fee simple estate, that means that you own your surface rights as well as what lies below your property. For those that are new to mineral rights, we’ve put together this Mineral Rights 101 quick guide to help you understand what exactly you own.

What are Mineral Rights?

Mineral rights are a property’s ownership rights of any resource that is found beneath the surface of the earth. Mineral rights can only be owned by individuals in a few countries around the world, including the United States.

Do I Own My Mineral Rights?

Usually, mineral rights ownership is defined in relation to surface rights. Surface rights, as you can imagine, entitle the owner to the surface and structures on the land.

The two most common forms of land ownership are fee simple and split estates. In a fee simple estate, you own every asset in the property from subsurface rights to the air above your house. In a split estate, the property rights can be sold to another person or group of individuals. Check your deed to see the specific information on your mineral rights ownership.

Things that You Own with Your Mineral Rights

Mineral rights designate the ownership of valuable resources such as oil, gas, gold, silver, copper, iron, uranium, etc. In order to extract and sell these minerals, most people choose to sell or lease their mineral rights to an oil and gas company. Here, the oil and gas company would need some access to your property’s surface to explore and obtain the resources.

Things that You DO NOT Own with Your Mineral Rights

Of course, it can get a bit complicated when trying to define what “resources” you actually own. Typically earthy materials (like sand, limestone, gravel, etc.) belong to the surface rights owner. Likewise, even if the water is in the plot’s subsurface, water rights are typically owned by the property’s surface rights owner.

Image Credit: Joel Deluxe/via Flickr

If you have further questions related to this mineral rights 101 guide, feel free to reach out to us here. 

Oil and Gas Lease Negotiation

Oil and Gas Lease Negotiation: Tips from Mineral Rights Experts

When negotiating an oil and gas lease, everything is on the table. In a sense, there is no real “standard” oil or gas lease agreement in the United States. Therefore, if you are considering signing a contract, it is important to become familiar with the best oil and gas lease negotiation tactics to maximize your financial opportunity.

Top 3 Tips for Oil and Gas Lease Negotiation

If you own your mineral rights, oil and gas companies may be interested in exploring your property. With the right contract and reserves, an oil and gas lease agreement can be a mutually beneficial financial arrangement. For this reason, we’ve put together the three most crucial steps you can take to leverage your stake in any oil or gas lease.

1. Start Off by Saying “No”

Generally, a good rule of thumb is, “never take your first offer.” If you just received a letter, email, or phone call from an oil company with an “unbeatable” contract, do not rush to sign on the dotted line. Chances are, if one company is interested, many more will be. This brings us to our second tip…

2. Take Your Time

Mineral rights are a valuable property, just like your home. Imagine that you are leasing out your subsurface to an oil and gas company just as if you were leasing your home to a renter. You will want to make sure that your co-signer is vetted and reputable. Watch out for companies trying to get you to sign offers that will disappear in less than a day.

3. Call an Expert for Oil and Gas Lease Negotiation

So long as you haven’t entered into an agreement before consulting a professional, there is still an opportunity to take the best step for oil and gas lease negotiation. Calling an expert is far and beyond the best way to leverage your buying power in any agreement. When it comes to oil and gas lease negotiations, industry experts are always going to be your most powerful resource.

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How Much Should I Sell My Mineral Rights For?

In the United States, mineral rights can be an extremely valuable asset. If you own property that may have reserves of oil, gas, or other resources, then that could be a hot commodity.

When selling mineral rights, you can earn a large lump sum of cash or purchase another property with serious tax advantages. Of course, this begs the question… how much should I sell my mineral rights for?

How to Value Your Mineral Rights

As you may imagine, there is no “one-size-fits-all” price package for selling mineral rights. Subsurface property values can range anywhere between zero and enough capital for retirement. Above all, here are the factors that will influence the value of your mineral rights:

Average Mineral Rights Price Per Acre

Typically, mineral rights are valued at a set price per acre. Occasionally, mineral rights sellers can also receive signing bonuses or future oil royalties. Mineral rights prices per acre vary heavily between states and individual negotiations.

Unfortunately, because mineral rights are not required to be public record a true “average price per acre” is too broad to calculate. Plus, mineral rights sales are simply far too individualized that any specific numbers may be misleading. More than anything, it is important to contact a professional to help you earn the most when selling your mineral rights.

Getting your Mineral Rights Evaluated

In order to dig a bit deeper into finding the best price for your mineral rights, there are a few steps you can take to learn more about the value of your property. We recommend any of the following actions:

  • Doing a competitive analysis. Although they are not public records, if you begin asking around, you may be able to dig deeper into mineral rights values in your area. Both government offices and social communities may be good resources.
  • Hiring a third-party appraisal. Have your mineral rights valued by an expert. If possible, hire a third-party landman who is not associated with an interested buyer.
  • Get someone to help you sell it. As you can imagine, the more offers you can get on your mineral rights, the better. The best way to get as many eyes on your property as possible is to work with a professional broker. Hire someone you can trust and let the market decide how much you should sell your mineral rights for.
oil and gas royalties by state

Oil and Gas Royalties By State

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In the United States, landowners have the ability to earn money from the resources below their property. If you own the subsurface below your land, then oil and gas companies may be interested in leasing or buying your mineral rights. Let us talk more about the oil and gas royalties by state.

Of course, not every plot in America is going to make you rich. The values of oil and gas royalties by state vary greatly. Above all, the size of your oil and gas royalty checks will depend on the size of your lot, your percentage share, and the amount of resources that are extracted and sold in a defined timeline.

Here is the list of oil and gas royalties by state, with the highest potential:

Texas

Everything is bigger in Texas, including its oil production. Texas produces, on average, over 2 billion more barrels of oil per day than any other U.S. State. And guess what, Texas also leads the country in natural gas production. All in all, the Lone Star State has the most opportunities to earn oil and gas royalties.

Pennsylvania

This may surprise some people, but the Keystone State is actually the 2nd largest producer of natural gas in the United States. Titusville, Pennsylvania is famous as the location for the first ever successful oil drilling on U.S. soil. However, since then, the state’s oil production has been overshadowed by many states to the West.

North Dakota

Besides Texas (and occasionally New Mexico), the only other state in the country that typically produces over a million barrels of oil per day is North Dakota. The Bakken formation in North Dakota’s western plains produces the majority of the state’s oil. In terms of natural gas production, North Dakota ranks 10th in the country.

Wyoming

If you were to look at each state’s total energy production (gas and oil combined), Wyoming ranks number three overall. This is impressive because Wyoming typically ranks between the fifth and tenth annual production of crude oil or natural gas alone. Overall, the state has a consistent amount of opportunities to earn oil or gas royalties.

Oklahoma

Lastly, we must mention the Sooner State, Oklahoma. Oklahoma sits in the dead center of the country with ample oil and gas resources below the state’s surface. Consistently, Oklahoma ranks in both the top five for the annual production of oil and natural gas. The state is also investing heavily in wind power and is slowly becoming an electricity powerhouse.

mineral-rights-expire

Do Mineral Rights Expire?

Owning property can raise a lot of questions, especially if your property is underground. Mineral rights entitle owners to the precious minerals below the Earth’s surface.

What happens when a mineral rights owner passes away or simply neglects their asset? In this article, we will explore the question “do mineral rights expire?”

Reverting Mineral Rights to Land Owners

Usually, if you own your property then you own your mineral rights. Sometimes, however, the mineral rights and surface rights can be divided into a split estate. If you purchase a plot of land, but the seller retains ownership of the mineral rights, then they can still operate a well on your property.

In some states, a defined period of inactive mineral rights ownership will cause mineral rights expiration. Here, the ownership of the mineral rights reverts back to the landowner. Depending on your location, this could be anywhere from 1 to 20 years.

In other cases, landmen can trace back centuries worth of land deeds in order to correctly identify the mineral rights owner or heir. Always check your state’s mineral rights laws before purchasing a split estate.

Mineral Rights Reservations

In rare instances, some parts of the country have designated special mineral rights reservations for the preservation of the earth. Most commonly, large companies selling their mineral rights will transfer the ownership of some of the land to a new party, while setting aside some for federal reservation. In this case, the mineral rights will not expire so long as the contract outlines the details of the reserve.

Conclusion

So, do mineral rights expire? Unfortunately, the answer is not a simple yes or no. In the past 50 years, more and more states have fought to revert mineral rights to landowners in the event of an abandoned split estate. Famously, mineral rights expire after 10 years in Louisiana and after 20 years in Ohio and North Dakota.

mineral rights ownership

Mineral Rights Ownership: How Do I Know If I Own My Mineral Rights?

Mineral rights are valuable. If you suspect that your land may have precious minerals below the surface, then you may be able to financially benefit. Do you have mineral rights ownership? Then you can sell or lease them to an oil and gas company to begin the extraction process.

If you’re not sure whether or not you have mineral rights ownership, then there are a few simple steps you can take. Below, we will outline the most common ways to determine your mineral rights ownership.

Fee Simple Estates – Know What You Purchased

If you purchased your land in a fee simple estate, then you’re golden! A fee simple estate infers that you own everything from your subsurface rights to the air above your property. In the case of a fee simple estate, it is very likely that you own 100% of your mineral rights.

Split Estates – How to Find Mineral Rights Owners?

If you did not purchase your land in a fee simple estate, then your mineral rights may be owned by another person or entity. Check your deed in order to see if the mineral rights ownership is defined in the contract.

In most cases, this information is accurate, however, occasionally those trying to make a quick buck may neglect mineral rights transactions that happened decades ago. If your deed does not define your property’s mineral rights ownership, then there are a few things you can do in order to trace back the title. This includes:

  • Hiring a Title Company
  • Hiring a Lawyer
  • Going to your Town’s Deeds Office
  • Conducting Independent Research

If you are able to successfully determine that there are no other owners of your mineral rights, then you can officially claim them as your own. In some states, you may find that your property was once a split estate, but that the mineral rights have expired and reverted back to the land owner.

Oil and Gas Royalty Deductions

Oil and Gas Royalty Deductions Guide for Tax Season

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There are only a few better feelings than getting your oil and gas royalty check in the mail. Whether you have decided to lease your mineral rights or you have aided in an operation’s production, the extraction and sale of oil or gas earn you a nice bit of money each month. Of course, all is fun and games until tax season. In this article, we will outline the most important things to know about oil and gas royalty deductions.

Depletion Allowances for Oil and Gas Royalties

Mineral rights are very valuable, that is until the resources have all been depleted. The IRS recognizes this and permits a depletion allowance on oil and gas royalty payments. Depletion allowances let property owners deduct the loss of value in the property’s subsurface, as well as any incurred expenses associated with owning the royalties.

Here, taxpayers can write off a portion of their income. Most commonly, people choose the standard 15% depletion deduction from the gross income. In other cases, heavily invested individuals can calculate the approximate remaining oil reserve. From there, they base their deduction on the amount of extraction that tax year.

Oil and Gas Royalty Deductions

Once your royalty checks start coming in, you may notice something. Usually, it is that there are some taxes that are out of your payment. Although the amounts vary between states, most U.S. states take out a severance tax on oil or gas production. This amount can be a deduction from your gross income. This includes any other business taxes or fees that have an association with the production.

Bonus Deductions

If you signed an oil and gas lease, then you may have received a nice upfront bonus payment. In the eyes of the IRS, this is considered ordinary income, in the rental property classification. There can be a deduction on your Schedule E on any bonus payment you receive. This includes any costs (like legal fees) in association with the lease negotiation.

If you have further questions about oil and gas royalty deductions, feel free to reach out to us here. 

oil royalties for dummies oil royalties for sale

What are Oil Royalties?

Oil royalties are a pretty simple concept but can warrant some very significant income. Here is a century fact in the United States. Individuals have been receiving oil royalties for the valuable resources below their property. In this article, we are going to give a brief overview of what are oil royalties. Additionally, we will talk about some opportunities for oil royalties for sale.

Oil Royalties for Dummies: A Simple Overlook

An oil royalty is a payment receivable for the percentage ownership on the sale of produced oil. The royalty amount is agreed upon between the mineral rights landowner and the oil producer in a mineral rights lease.

Mineral Rights Leases: The Lessee vs. The Lessor

In a mineral rights lease, a landowner allows an oil company (as well as surveyors and engineers associated with the production) to explore their land for the purpose of extracting oil.

Here, the property owner is the lessor. The Lessor will still maintain the ownership of the property after the lease has expired. Similarly, the oil company is going to be the lessee. The lessee is entitled to the property’s subsurface for the duration of the lease, with access to the property’s surface defined in the contract.

How Can I Get Oil Royalties?

Once you found out what are oil royalties, the next question is to understand what is the most common way to get oil royalties. The answer is simple – it’s about leasing your mineral rights. Do you own property that may contain valuable resources below its surface? Then oil and gas companies may want to lease your land. In negotiating an oil and gas lease, you will likely receive an upfront bonus payment as well as monthly oil royalties from the sale of the minerals extracted from your land.

How Much are Oil and Gas Royalty Payments?

As you may imagine, there is a huge range between different oil and gas royalty payments around the country. For most oil and gas leases, the property owner receives between 10% to 25% of the sale of precious minerals extracted from the land.

As wells can produce highly variable amounts of oil and gas, royalty payments can range anywhere from a few hundred dollars to tens of thousands of dollars each month. Commonly, oil and gas royalty payments are split between multiple owners.

If you have further questions about oil royalties or have oil royalties for sale, we can assist you further here.