Selling oil and gas mineral rights can be a life-changing event.

Whether you’re selling a small interest or a large portfolio, the payout can be significant. But once the dust settles and the check clears, there’s one thing a lot of mineral owners aren’t fully prepared for: taxes.

We get it. Nobody gets excited about capital gains, depreciation recapture, or 1031 exchanges.

These tax terms can sound intimidating, and it’s easy to feel overwhelmed if you’re not familiar with how it all works. But understanding the tax side of your mineral rights sale is just as important as negotiating the best price.

In this post, we’re going to break down the key tax topics you need to know after selling your mineral rights. We’ll cover how capital gains taxes apply, what depreciation recapture means (and when it matters), whether you can defer taxes using a 1031 exchange, and some smart strategies to reduce your tax bill.

Our goal is to make this simple. No confusing tax jargon or legal talk.  Just clear, honest guidance that helps you make the most of your mineral rights sale.

And of course, if you haven’t sold yet, keep in mind that working with a specialized mineral rights broker like Texas Royalty Brokers can not only help you get top dollar but also connect you with professionals who understand how to handle the tax side the right way. You’ll walk away with more money and a lot less stress.

When you sell your mineral rights, the IRS may come knocking for a portion of your profits. That’s because the money you make from the sale is usually considered a capital gain. But don’t worry. We’ll walk you through how it works in plain English.

What Is a Capital Gain?

A capital gain is the profit you make when you sell an asset for more than what you paid for it. With mineral rights, it’s the difference between what you originally acquired the rights for (your “basis”) and what you sold them for.

Here’s a simple example:

• You inherited mineral rights valued at $50,000 (this becomes your tax basis).

• You sell those rights for $150,000.

• You now have a $100,000 capital gain.

That $100,000 is taxable.

Short-Term vs. Long-Term Capital Gains

The amount you owe depends on how long you owned the rights before selling.

• Short-term capital gains apply if you held the rights for less than one year. These are taxed at your ordinary income tax rate, which is typically higher.

• Long-term capital gains apply if you held the rights for more than one year. These are taxed at lower, more favorable rates, usually 15% or 20% depending on your income.

Most mineral owners qualify for long-term capital gains, especially if the rights were inherited or held for years before selling.

How Much Will You Owe?

Your capital gains tax rate depends on your income bracket. Here’s a rough idea of the federal long-term capital gains tax rates:

• 0% if your income is under $89,250 (for married couples filing jointly)

• 15% if your income is between $89,251 and $553,850

• 20% if your income is over $553,850

Keep in mind these numbers can change from year to year, and your state may also charge capital gains taxes.

What If You Inherited the Mineral Rights?

This is where a lot of mineral owners catch a break. If you inherited the mineral rights, your tax basis is adjusted to the fair market value at the time you inherited them. This is called a step-up in basis, and it can significantly reduce the taxes you owe.

For example, let’s say your grandparents bought the mineral rights for $5,000 back in the 1960s. When you inherited them in 2022, they were worth $75,000. That $75,000 becomes your new basis. If you sell them for $100,000, you’re only taxed on the $25,000 difference. You don’t have to worry about what your grandparents originally paid.

Why This Matters Before You Sell

Knowing how capital gains work can help you plan your sale more carefully. If you’re close to owning the rights for a full year, or close to moving into a higher tax bracket, the timing of your sale could make a big difference in what you owe.

At Texas Royalty Brokers, we help mineral owners look at the full picture. It’s not just about getting a great offer. It’s also about helping you keep more of what you earn after taxes. When you work with us, we’ll connect you with professionals who understand these tax details and can help you make smart decisions before you sell.

If you’ve ever claimed depreciation on your mineral rights or royalty income, there’s one tax detail you need to pay close attention to when it comes time to sell. It’s called depreciation recapture, and it can sneak up on you if you’re not prepared.

What Is Depreciation?

Depreciation is a tax benefit that lets you deduct the declining value of an asset over time. In the world of oil and gas, royalty owners and working interest owners can sometimes claim depletion or depreciation to reduce taxable income.

If you’ve received income from your mineral rights ownership in the past and took tax deductions related to them, there’s a chance the IRS will want some of that back when you sell. That’s where depreciation recapture comes in.

So, What Is Depreciation Recapture?

Depreciation recapture is a tax the IRS charges when you sell an asset that you previously depreciated. In simple terms, if you’ve already claimed some of the value of your mineral rights as a deduction, the IRS wants to “recapture” part of that deduction when you sell.

Let’s look at an example:

• You claimed $30,000 in depreciation or depletion over several years.

• You later sell your mineral rights for a gain.

That $30,000 you previously deducted could now be taxed at a higher rate, separate from your regular capital gains tax. This is what’s called recapture income, and it can be taxed at up to 25% depending on your situation.

Does Depreciation Recapture Affect Everyone?

No, it depends on how you handled taxes in the past.

If you inherited your mineral rights and never claimed any depreciation or depletion, you probably don’t need to worry about this. But if you’ve been collecting income and taking deductions year after year, depreciation recapture could absolutely come into play when you sell.

This is especially common with:

• Working interest owners who depreciated expenses related to production.

• Royalty owners who took depletion deductions on income earned from leasing.

If you’re not sure whether this applies to you, a tax advisor or CPA can help you review past returns and figure out if you need to plan for recapture taxes.

Why It Matters Before the Sale

A big sale price sounds great, but depreciation recapture can take a bite out of your profits if you’re not expecting it. By knowing this ahead of time, you can plan for it and make sure you’re setting aside enough to cover your tax bill.

At Texas Royalty Brokers, we don’t just help you sell, we help you understand what happens after the sale too. We can help guide your tax professional, who can help you navigate depreciation, depletion, and anything else the IRS might throw your way. That way, there are no surprises after closing.

One question we hear often is, “Can I defer taxes using a 1031 exchange when I sell my mineral rights?” The short answer is yes, but only if the type of mineral interest you own qualifies under IRS rules.

Not all oil and gas interests are treated the same. Some count as real property, which is required for a 1031 exchange, while others are considered personal property and don’t qualify. Let’s walk through the differences.

What Is a 1031 Exchange?

A 1031 exchange is a tax strategy that allows you to defer paying capital gains taxes when you sell one investment property and reinvest the proceeds into another property of like kind. It’s commonly used in real estate, but it can also apply to certain types of mineral rights.

To qualify, both the property you sell and the property you buy must be considered real property by the IRS.

Which Mineral Rights Qualify?

This is where a lot of mineral owners get confused. Some mineral-related assets qualify as real property and are eligible for a 1031 exchange. Others are classified as personal property and don’t meet the requirements.

Let’s break it down clearly:

Mineral Interests That Do Qualify:

• Mineral Interest (Fee or Leased):
  This is actual ownership of the underground minerals. You might own the minerals outright, or you may have leased them to an operator but still hold title to the minerals. These are treated as real property and typically do qualify for a 1031 exchange.

• Working Interest (WI):
  A working interest gives you the right to develop the minerals and share in production costs and revenue. If this is structured as an ownership interest, it can also qualify as real property.

Interests That Do Not Qualify:

• Overriding Royalty Interest (ORRI):
  This is carved out of a lease and gives you a percentage of production revenue without owning the minerals. It’s a contractual right, not a real property interest, so it does not qualify.

• Net Profits Interest (NPI):
  This gives you a share of profits after expenses, but not actual mineral ownership. Like an ORRI, it’s considered personal property and does not qualify.

• Production Payments or Income Streams:
  If you’re only selling the right to future payments from production, this also doesn’t meet the IRS definition of real property.

Why It Matters

If you own true mineral rights, either fee ownership or leased minerals, you may be able to use a 1031 exchange to defer taxes. But if you’re selling something like an ORRI or just an income stream, you’ll likely be on the hook for capital gains taxes when you sell.

It’s important to know exactly what you own. Many mineral owners think they can do a 1031 exchange, only to find out later that their interest doesn’t qualify. That can lead to a hefty and unexpected tax bill.

Is a 1031 Exchange Worth It?

If your interest qualifies, a 1031 exchange can be a great way to reinvest without immediately paying capital gains taxes. You must follow some strict IRS rules to do it properly:

• You need to identify the new property within 45 days of your sale.

• You have 180 days to close on the new property.

• The replacement property must be of equal or greater value and also be classified as real property.

You also need to use a qualified intermediary to handle the funds. You can’t take possession of the money during the process, or the tax deferral won’t work.

This strategy isn’t for everyone. It’s complex and works best when you already know what kind of property you want to buy next. But if done right, it can save you a lot in taxes.

At Texas Royalty Brokers, we’ve worked with sellers who successfully used a 1031 exchange. We help you understand what you own, connect you with professionals who specialize in oil and gas tax law, and make sure you’re heading into the sale with the right plan in place.

Selling mineral rights can come with a sizable tax bill, especially if you’re looking at capital gains and possibly depreciation recapture. The good news is, with a little planning, there are ways to legally reduce what you owe and keep more money in your pocket.

Below are some smart tax strategies to consider before and after the sale.

1. Time the Sale Strategically

Picking the best time to sell mineral rights can have a big impact on your tax liability.

If you expect to have a lower income in an upcoming year, such as retirement, a job change, or a drop in business income, it might make sense to wait and sell during that year. Lower income means you may fall into a lower tax bracket, which can reduce the percentage of capital gains taxes you’ll owe.

Selling early in the year can also give you more time to work with a CPA and plan for how to handle the gain before year-end.

2. Use the Step-Up in Basis if You Inherited the Rights

As mentioned earlier, inherited mineral rights receive a step-up in basis to their fair market value at the time of inheritance. This can dramatically reduce the amount of capital gains you’ll owe when you sell.

For example, if your inherited minerals were valued at $100,000 when you received them and you sell them for $110,000, you’re only taxed on the $10,000 gain—not the full value.

If you inherited the rights a long time ago, consider getting a current appraisal before selling. A qualified appraiser can help establish a fair market value, which you’ll need for tax purposes anyway.

3. Spread Income Across Multiple Years

In some cases, it may be possible to structure the sale in a way that allows the income to be recognized over time. This is called an installment sale.

With an installment sale, you receive payments over multiple years, and the tax is paid as you receive the income. This can help keep you in a lower tax bracket and spread out your tax liability.

Note: Not all mineral rights sales can be structured this way, and many buyers prefer to pay in full. But if spreading the income is important to you, let your broker know early so they can screen for buyers who are open to that arrangement.

4. Contribute to Retirement Accounts

If you’re still working and eligible, contributing to retirement accounts like an IRA or 401(k) can help reduce your taxable income for the year of the sale.

For example, if the sale pushes you into a higher tax bracket, increasing your retirement contributions could help bring your adjusted gross income back down. It’s not a massive tax strategy, but every little bit helps.

Talk to a financial advisor about your options. There may be other tax-advantaged accounts worth considering too.

5. Offset Gains with Losses

If you have other investments, such as stocks or property, that are currently sitting at a loss, selling them in the same year as your mineral rights can help offset the capital gains.

This strategy is called tax-loss harvesting and can reduce the total amount of taxable gain for the year. You’re essentially using a loss on one investment to cancel out the gain on another.

You can deduct capital losses up to the amount of your capital gains, and if you have more losses than gains, you can carry over the extra loss to future years.

6. Consult a CPA Who Specializes in Mineral Rights

This might be the most important strategy on the list. Oil and gas taxation is not like typical income tax. There are unique rules, deductions, and classifications that only professionals with mineral rights experience fully understand.

A good CPA can help you:

• Calculate your basis accurately

• Decide whether a 1031 exchange is realistic

• Understand depreciation recapture

• Avoid common mistakes that can lead to audits or overpayment

At Texas Royalty Brokers, we always recommend working with a tax professional before your sale closes.

Even smart mineral owners can get tripped up by tax rules after a sale. Here are some of the most common mistakes we see and how to avoid them.

1. Skipping the Basis Calculation

Your basis is what you originally paid or the value when you inherited the rights. If you don’t calculate it correctly, you could end up paying tax on more than you actually earned. Always document your basis clearly. If the minerals were inherited, you can read our mineral rights tax article on how to back into your step-up basis.

2. Assuming You Qualify for a 1031 Exchange

Not every mineral interest qualifies. If you’re selling an ORRI, production payment, or another non-ownership interest, you probably do not qualify. Check with a tax professional before trying to defer taxes through a 1031 exchange.

3. Overlooking Depreciation Recapture

If you took depletion or depreciation deductions in past years, the IRS may tax part of your gain at a higher rate. This is called depreciation recapture, and many sellers are surprised by it at tax time.

4. Not Setting Aside Money for Taxes

It’s easy to focus on the check and forget about the tax bill. Work with your CPA to estimate how much you’ll owe and set that money aside as soon as the sale closes.

5. Doing It All Without a Specialist

Mineral rights taxes are different from typical investment or property sales. Using a general accountant or trying to handle it all yourself can lead to mistakes. A CPA with oil and gas experience can save you money and prevent problems down the road.

Selling your mineral rights is a big decision. Whether you’re walking away with a little or a lot, understanding the tax side of things is just as important as getting the best price.

Capital gains, depreciation recapture, and the potential for 1031 exchanges can all impact how much you keep when the deal is done. The key is to plan ahead and surround yourself with people who understand the process.

At Texas Royalty Brokers, we do more than just connect sellers with qualified buyers. We help mineral owners make smart decisions from start to finish. That includes pointing you to trusted tax professionals, helping you understand your options, and making sure there are no surprises when tax season rolls around.

You only get one chance to sell your mineral rights. When you do it right, it can be a financial win that sets you up for the long haul. When you do it without the right guidance, you could end up leaving money on the table or facing a tax bill you didn’t expect.

If you’re thinking about selling, reach out to Texas Royalty Brokers.  We’ll help you get the most value with the least amount of stress.