Last Updated on If you have just inherited mineral rights for the first time, you will need answers to a lot of questions.
You will have to wade through legal and financial definitions. Tax liability will have to be determined, as will the value of what you have just inherited. Another issue is whether you should sell your mineral rights or keep them and collect royalties. Pheasant Energy, an oil and gas company currently seeking mineral rights acquisitions, can help you if you’d like to sell.
In the paragraphs that follow, we will cover what you need to do next, the tax liabilities you can expect, how to determine the cost basis or “fair value” of your inherited mineral rights, and the process for selling those rights if you choose to go that route. We’ll also specifically cover inherited mineral rights Oklahoma transferees receive and how those differ from mineral rights in other parts of the country.
What is the legal process for claiming your inherited mineral rights?
The person inheriting an asset is known as the “transferee.” As the transferee, your first step is to obtain a deed of mineral rights from the “transferor.” In the case of an inheritance, the transferor would be the estate of the deceased.
How inherited mineral rights transfer works?
It’s likely that your loved one if he or she left a will, designated someone to manage their assets while the validity of the will is being established. The executor of the will can transfer mineral rights to you, which allows you to mine and sell resources yourself, or you can enter into a mineral lease agreement that gives another individual right over the mineral. To transfer inherited mineral rights:
- A mineral title search must be performed by an attorney or title company to ensure that your deceased loved one had the legal right to convey the property.
- A mineral deed will be created with a detailed description of all the rights you will be receiving when mineral rights are separate from the land’s surface.
In most scenarios, by the time you get to sit with the executor of the will, all of the necessary paperwork will have been done for you.
Check it to make sure everything is in order. The deed should include a legal description of the inherited mineral rights and a warranty of title from the grantor. These documents must then be submitted to the local land recorder’s office for an examination and final approval.
Before transferring mineral rights, the estate attorney should have conducted a title search to ensure the estate actually owns those rights.
Keep in mind that the rights to harvest minerals and the land you harvest them from are actually two different entities by law.
As the transferee, you should know who owns the property, as you may need to bring in equipment or build on that land to get at the minerals, oil, or gas that lies under the surface.
Another thing to check for is whether or not the mineral “rights” is a mineral “lease.” A lease is a different arrangement. It doesn’t give you full rights to dig or drill whenever you like.
There’s a limited time limit on when you can exercise your rights. Leases are not common with an inheritance, but it’s a reasonable precaution to check to make sure you’re not on the clock to exercise your options.
What are Landmen, and how can they help?
Landmen are independent contractors hired by oil and gas companies to seek out and facilitate mineral rights purchases. These individuals are experts in mineral rights ownership and can assist you in researching property ownership.
Remember, the property and the mineral rights are two separate entities. You may have inherited the mineral rights, but you need to know who owns the property if you want to drill. The opposite scenario is to check who owns the mineral rights on the property you inherited.
Oil and Gas Landmen can help you determine your mineral rights’ cost basis and structure a fair deal with the oil and gas company. They are also required to stay up to date on the laws governing mineral rights. Also, landmen can guard you against fraud or misrepresentation in any deal you decide to make.
Are inherited mineral rights taxable?
The federal government does not consider inherited mineral rights taxable. Still, any income you accumulate from those rights does have to be reported on your tax return.
This is another question you should ask when you accept your inheritance.
- Is the property currently being mined, harvested, or drilled?
If so, how much is it generating in annual income, and what should you expect to have to pay in taxes on those royalties?
The estate attorney or executor should be able to answer those questions for you. Feel free to check our article on how to report oil and gas royalties on a tax return for more information.
The IRS may not charge you an inheritance tax, but certain states in the country do. Those states are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
If the deceased lived in any of those states, you could be subject to an inheritance tax unless you’re a spouse of the decedent, in which case you are tax exempt.
How do you determine the cost basis for inherited mineral rights?
Another term used for the cost basis for inherited mineral rights is “fair value.” It is essentially the book value of what you inherit on the day you inherit it.
Cost basis is determined by using what is known as a “step-up” process where the original value of an asset, in this case, your inherited mineral rights, is upgraded to reflect its current-day value.
This number is crucial because you’ll have to pay capital gains tax on the difference between your cost basis and the sale price if you sell your rights later on.
It would be wise to have an independent valuation firm check the math on the stated cost basis or fair value of your inherited mineral rights.
There are dozens of variables that can go into calculating this number.
- The price of oil or gas, for instance, goes up and down. Land values rise and fall. You’ll want the cost basis number to be as accurate as possible.
- If it’s set too low, you’ll pay higher capital gains taxes when you sell.
- If it’s too high, you’ll make less of a profit on a sale or possibly even take a loss.
How are taxes on the sale of inherited mineral rights calculated?
Let’s imagine for a moment that you receive your deed, you’ve been to the land recorder’s office, and you’ve established a cost basis. Now you want to sell your inherited mineral rights to another interested party. What do you have to do? Your first step should be to hire an attorney.
Remember all of the steps the estate attorney had to take before you could get your deed or lease? You now need to take those same steps.
A sale of your inherited mineral rights will result in a tax liability, namely a “capital gains tax.“
In 2020, the capital gains taxes on the sale of inherited mineral rights were calculated using three tax rates that are set according to the individual or family’s annual income. The first and obviously preferred tax rate is 0%.
- If you’re a single individual making less than $40,000, or a part of a married couple that makes less than $80,000, your capital gains tax on a sale will be $0.
- Singles making between $40,001 and $441,500, or couples making between $80,001 and $496,600, pay 15% capital gains tax.
- Anyone over those respective thresholds, either singles or couples, pays 20%.
What’s different about mineral rights in Oklahoma?
If your mineral rights are in Oklahoma, there’s a better than average chance that the land they are attached to is already producing oil or gas, and you will be collecting royalties. In 1927, Oklahoma was the highest producing oil region in the world.
Today the state still ranks in the top five for oil and contributes to 9% of the natural gas production in the United States. With all of that production and over 480,000 wells drilled, you might have just struck “black gold.”
Of course, there are no guarantees.
The odds are in your favor, but the value of mineral rights on non-producing properties could be as little as a few hundred dollars, or it could be several thousand dollars.
The difference in cost basis varies based on the county that the mineral rights property is located. Some counties are historically more productive than others, so the mineral rights are worth more.
If you find yourself holding mineral rights in an oil and gas region like Oklahoma, you should seek some professional advice. At Pheasant Energy, we have a mineral management team that is continuously evaluating and maximizing oil and gas revenues for folks just like you. As we mentioned above, they are looking to acquire inherited mineral rights and give you fair value for your claim. This can be done with an outright purchase or lease agreement.
Conclusion
The mineral rights you inherited are your invitation into a lucrative and exciting world few people are familiar with. You have just learned about the potential tax liabilities you face, what a deed and warranty of title are, and where to register your deed (land recorder’s office).
We also went into the variables used to calculate cost basis, aka fair value, and the questions and challenges you’ll face if you choose to sell your mineral rights. There are also some details about what all of this means in the State of Oklahoma, one of the nation’s most abundant oil and gas producers.
Now that you have more knowledge about inherited mineral rights, do you know what you’d like to do with your inheritance?
Keep it and collect royalties or sell it and make a profit?
Maybe you’d like to lease your rights to a bigger company that can develop the property they are attached to? If you need more information or need expert advice to make your final decision, please reach out to us.
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