Deep beneath the sun-baked surface of Texas lies a treasure trove of minerals and resources that have fueled the state’s economy for generations. From the vast oil fields of the Permian Basin to the hidden reserves of precious metals and rare earth minerals, Texas is a veritable gold mine of natural wealth. Living in Texas, many individuals inherit mineral rights from family members previously deeply connected with this boom or bust industry. However, if you aren’t familiar with this term and the significant tax implications associated with mineral rights, you aren’t alone.
In Texas, mineral rights can have tax implications for both the landowner and the owner of the mineral rights. Mineral rights refer to the legal right to extract and exploit minerals found on or underneath a piece of land. The ownership of mineral rights in Texas can be separate from the ownership of the surface rights, and mineral rights can be bought, sold, or leased independently of the land itself.
When having conversations about oil and gas production, there are different terms that might come up in conversation, and it’s important to understand the difference between surface rights and mineral rights.
Surface rights are exactly what they sound like, rights to mine minerals and resources on the surface of the earth. These do not pertain to anything under the earth and typically only extend ~200 feet below the surface in most jurisdictions.
Mineral rights are ownership interests to any underground substances that can be located, extracted, and sold. These are very common in Texas and the mid-continent region and can range in complexity. Check out this article for an in-depth description: https://www.pheasantenergy.com/mineral-rights/#Types-of-Minerals.
Just as land can be bought and sold, so to can mineral rights, which is not to be confused with leasing your mineral rights.
Selling your mineral rights typically conveys all of your “right, title, and interest” to the property, and with it any claim that you may have to lease or sell those minerals in the future, any potential lease bonus income, and most importantly any current or future royalty income. For this reason, selling your mineral rights usually goes for a much higher price than simply leasing your mineral rights
Leasing your mineral rights retains your ownership of the interest, but provides to the leasor (the person leasing from you) the legal ability to drill and produce on your mineral estate for a specific time, typically 3 years. If the leasor is able to successfully drill and produce a commercially viable well (one that is profitable) they will continue to hold that lease in perpetuity until that well, or any subsequent well drilled is no longer commercially viable. In consideration for this lease, the leasor typically pays a:
- Lease bonus which is a one-time up-front payment for the lease, whether a well is ever drilled or not and
- A royalty on any production that is produced under said lease. The royalty does not generate any income if no well is drilled and the lease expires but will continue to produce revenue for the life of a well that is drilled.
Knowing the ins and outs of mineral rights can be tricky and sometimes confusing, but maximizing the value of the assets by making sure they are accounted for in your estate plan is essential.
Tax laws related to mineral rights can be complex and may vary depending on the specific circumstances involved. It’s always a good idea to consult with a tax professional with experience in mineral rights before making any decisions regarding buying, selling, or leasing mineral rights. We can help you navigate your questions and more. Simply contact us for a free consultation, and we’d be happy to walk through your unique scenario and recommend best practices.
For more information, check out this article about the 10 Tips Every Mineral Owner Should Know: https://www.usmineralexchange.com/blog/sell-mineral-rights/10-tips-every-mineral-owner-should-know/