Never Sell Mineral Rights

The phrase “never sell mineral rights” has long been passed down as conventional wisdom, particularly in regions rich with oil and gas. It originated from a time when holding onto mineral rights was seen as a ticket to future wealth, with the potential for significant profits through leases or royalties as companies extracted resources.

This advice was especially relevant in the early 20th century, when oil booms created enormous wealth for landowners who retained their rights. Over time, this mantra became deeply ingrained in certain communities, encouraging landowners to view mineral rights as long-term investments. As markets, technology, and environmental factors have evolved, the unquestioned belief in never selling mineral rights may no longer be the best strategy for everyone.

This mindset doesn’t consider the unpredictable nature of oil and gas prices, the modern ability to easily diversify your investments, and the tax consequences of collecting royalty income vs the tax benefits of selling mineral rights.

In short, the age old wisdom to never sell mineral rights is outdated.  There are some very compelling reasons to sell mineral rights.

Deciding whether to sell your mineral rights is a personal choice, and there’s no one-size-fits-all answer. For some, holding onto these rights makes sense, but for most mineral owners, selling is likely a smarter financial move.

If you’re debating what’s best for your situation, here are nine reasons why selling your mineral rights might be the right decision for you:

1. Tax Savings – This is the #1 Reason why 99% of Mineral Owners Sell!
   Selling your mineral rights may allow you to take advantage of specific tax benefits, such as capital gains tax treatment and step-up basis.  By converting future royalty income into a lump sum sale, you will lower your overall tax liability.  For some mineral owners, you could be saving $100,000+ in taxes.  If your mineral rights are valued over $3,000,000, it is possible you could save over $1,000,000 in taxes.   We have a section below which talks more about this very important topic. Taxes are a boring topic, but do not ignore the most important reason why most mineral owners decide to sell!
2. Diversification of Assets
   Diversification is #2 on the list for a reason.  There are lot of mineral owners who continue to hold mineral rights as a large portion of their net worth.  This is a bad idea and long term financial strategy!  Relying solely on mineral rights as your retirement plan is extremely risky.  Selling allows you to diversify your investments into other areas like stocks, real estate, or retirement accounts, reducing your financial exposure to a single asset.  In addition, you have complete control over other investments and no control over mineral rights ownership.
3. Immediate Financial Gain
   Selling your mineral rights can provide a lump sum of cash that you can use right away. Whether it’s to pay off debt, fund a large purchase, or invest in new opportunities, selling can offer immediate liquidity.
4. Fluctuating Oil and Gas Prices
   The value of your mineral rights often depends on the prices of oil and gas, which can be highly volatile. Market conditions change due to global supply and demand, geopolitical events, and technological shifts, meaning your rights could be worth a lot less in the future. Selling locks in today’s value and removes that uncertainty.
5. No Guarantee of Royalty Income
   Just because you own mineral rights doesn’t mean the oil and gas will ever be extracted. Companies might never drill on your land, leaving you with no royalties. Selling offers guaranteed money now, regardless of future development.
6. Inconsistent Royalty Income
   Even if resources are extracted, royalty income can be unpredictable. Payment amounts vary based on production levels, market prices, and operational costs. Selling gives you financial stability without relying on fluctuating royalties.
7. Estate Planning Simplification
   Mineral rights can complicate estate planning and create challenges for future generations. Selling simplifies your estate and ensures a smoother transfer of wealth to your heirs without the legal and administrative headaches that mineral rights can cause.
8. Changing Financial Needs
   Your financial goals may have changed since acquiring your mineral rights. Selling allows you to meet new goals, such as funding education, launching a business, or covering healthcare expenses.
9. No Control Over Mineral Rights
   When you own mineral rights, you have no control over any part of the process.  The operator chooses when to drill, and the market determines the value of the oil and gas being extracted.  You are simply along for the ride.   If you own stocks or real estate, you get to control the timing and direction of the investment.
10. Waiting Game
    You could be holding your mineral rights for decades and nothing happens.   Mineral rights is a waiting game.  Mineral owners have a common belief that drilling is right around the corner.  We talk to mineral owners that are certain drilling will occur.  10 years later, nothing has happened, and it might be 10 more before anything occurs.

These reasons above highlight the benefits of selling, but the choice should always reflect your personal financial goals and situation.

One of the most significant benefits of selling your mineral rights is the potential tax savings.

Collecting royalty income from mineral rights means that you’re typically taxed at ordinary income tax rates, which can be as high as 40% or more depending on your income bracket. However, by selling your mineral rights, the money you receive may be taxed at the much lower capital gains tax rate—usually around 20%. If you inherited your mineral rights, the tax benefits can be even greater, with effective tax rates as low as 0% to 10%.

Let’s break down the tax advantages in more detail:

1. Ordinary Income Tax on Royalties

When you receive royalties from mineral rights, that income is taxed just like wages or salary. For high-income earners, this can result in a tax rate of 37% federally, plus additional state taxes. In some cases, your total tax burden could exceed 40%.

Example:
If you earn $100,000 in royalty income in a year and are taxed at a 37% federal rate, you could end up paying $37,000 in federal taxes alone, not including state taxes. This leaves you with only $63,000 after taxes.

2. Capital Gains Tax Rate on Sale of Mineral Rights

When you sell your mineral rights, the proceeds are typically taxed at the long-term capital gains tax rate, which is significantly lower than ordinary income tax rates. For most people, this rate is 15% or 20%, depending on your income.

Example:
If you sell your mineral rights for $100,000, and you’re subject to the 20% capital gains rate, you would owe only $20,000 in taxes. That leaves you with $80,000, a significant savings compared to paying ordinary income taxes on royalties.

3. Further Tax Benefits for Inherited Mineral Rights

If you inherited your mineral rights, you could benefit even more from something called the “stepped-up basis.” This means the tax basis of the mineral rights is adjusted to the fair market value at the time of inheritance. In many cases, this results in little to no capital gains taxes when the rights are sold. Even if there are gains, the rate is often 0% or 10%, depending on your tax bracket.

Example:
Let’s say you inherit mineral rights that were worth $100,000 when the original owner passed away, and you later sell them for $110,000. Your taxable gain would only be $10,000. If you fall into the lower capital gains tax bracket of 0%, you pay nothing in taxes. If your rate is 10%, you’d owe just $1,000 in taxes, leaving you with $109,000.

Summary of Tax Advantages:

• Royalty Income Tax Rate: Up to 40%+ (ordinary income tax rates)
• Capital Gains Tax Rate: Typically 20%
• Inherited Rights Tax Rate: 0% to 10% with stepped-up basis benefits

These examples show how selling your mineral rights can significantly reduce your tax liability compared to holding onto them and collecting royalties. It’s always a good idea to consult with a tax advisor to fully understand your situation and how much you could save by selling.

While owning mineral rights might seem like a valuable long-term asset, it’s important to recognize that it comes with several financial risks. These risks can impact both the short-term and long-term profitability of your investment. Here are a few key concerns to keep in mind:

1. Fluctuating Market Prices
   The value of mineral rights can change dramatically due to the volatile nature of oil, gas, and other resource markets. Prices can drop unexpectedly, reducing the potential value of your rights.  A mineral rights buyer might be willing to pay a certain price when oil is high, but if prices drop they will reduce the price they are willing to pay.
2. Inconsistent Royalty Income
   Even if your minerals are being extracted, the amount of oil and gas royalty royalty income you receive can be unpredictable. Production levels often fluctuate due to operational issues or market conditions, leading to irregular payments.
3. Delayed or No Development
   There’s no guarantee that your mineral rights will ever be developed. Companies may decide not to extract resources for years, or at all, leaving you without the income you anticipated.

Holding mineral rights can be a gamble, with potential income and value fluctuating due to market conditions, inconsistent production, or a lack of development. While there may be opportunities for profit, it’s crucial to weigh these risks against your financial goals. Selling your rights could provide more immediate and stable financial returns, allowing you to avoid these uncertainties.

In certain situations, holding onto your mineral rights can be a smart move. Here are two key reasons to consider keeping them:

1. High Tax Basis
   If you purchased your mineral rights at a high price, your tax basis is substantial. This reduces the capital gains tax advantages of selling, as you may not realize significant tax savings. In such cases, holding onto the rights could provide better long-term financial potential.
2. Diversified Portfolio with High Net Worth
   If you have a large net worth and a well-diversified portfolio, and mineral rights make up less than 5% of your total assets, holding onto them poses minimal financial risk. In this case, you can afford to weather any fluctuations in value or royalty income without it significantly affecting your overall financial position.

These two factors can make holding onto mineral rights a more practical option for individuals in certain financial circumstances.  While holding can make sense for a select number of mineral owners, selling makes more financial sense due to taxes and diversification.

When selling your mineral rights, working with an expert is crucial to ensuring you get the best deal. The best approach is to find a mineral rights broker who specializes in mineral rights transactions and has experience in your specific geographic area. These brokers are familiar with local market conditions, industry trends, and the companies likely to buy in your region.

In addition, a mineral rights broker will help create competition for your mineral rights.  This is key if you want to sell mineral rights for the best price.  A lot of mineral owners get a few offers and take the highest one.  This will result in selling below fair market value for mineral rights.  You need thousands of buyers to compete to ensure the best price, and that is what a mineral rights broker does to ensure you get the best price.

A mineral rights broker will help you navigate the complexities of the sale, from valuation to negotiating with buyers, ensuring you maximize your return. By choosing a broker with expertise in mineral rights, you can feel confident that the sale process will be handled professionally and to your financial advantage.

Deciding what to do with your mineral rights is a big decision, and the right strategy depends on your unique situation. If you’re considering selling, talking with an expert is the best way to ensure you’re making an informed choice. We specialize in mineral rights and can help guide you through the process, from valuation to finding competitive buyers.

Fill out the form below to get in touch with us, and let’s discuss how we can help you maximize the value of your mineral rights.