Below are some of the most common reasons to sell mineral rights in Texas.
Remember that each situation is unique. Deciding whether you should sell is personal. Never let anyone put pressure on you to sell mineral rights or to hold mineral rights. Take a look at your situation and make the right decision for you.
Common reasons for selling mineral rights in Texas:
Taxes: The number one reason to sell mineral rights in Texas is to save money on taxes. Let’s look at three examples:
1. Inherited Mineral Rights: Let’s assume you inherited mineral rights. These mineral rights were inherited in 2015 when the inflation adjusted price of oil was $48.43. Let’s assume you sell them today when oil prices are $75/barrel. Let’s assume a sales price of $500,000. Due to stepped up basis, you will only pay taxes on 35.4% of the total sales price (difference between when you inherited vs current price of oil). This means that even though you sold for $500,000, you only pay taxes on $177,133! In addition, you only pay capital gains tax rates! This means you will only pay 20% tax rate on the $177,133 sales price, or owe $35,426 in taxes on a $500,000 sale. Incredible! This means you paid only a 7.0% tax rate selling for $500,000!!! Note: Texas does not have a capital gains tax if you live in Texas!
2. Capital Gains: Let’s assume you did not inherit mineral rights, but instead you received them with land you purchased (not common). Let’s assume you have $0 basis in the mineral rights (worst case scenario). If you sold the mineral rights, you would owe capital gains taxes on the $500,000 sale. This means you would pay $100,000 in taxes on a $500,000 sales or 20% of the total.
3. Collect Royalty Income: Let’s assume you collect $500,000 in royalty income over a 10 year period. Royalty income is taxed as ordinary income. This means that any royalty income you receive is like getting paid more at your job. While everyone has a unique tax situation, in most cases you are going to be paying between 22% and 24% in federal taxes. This means your $500,000 in royalty income is going to cost you $120,000 (24%) in taxes compared to simply selling the mineral rights and saving $20,000. More importantly, when you sell mineral rights you get all of that money TODAY as compare to waiting 10+ years to collect $500,000 in royalty income. Would you rather have $400,000 TODAY or wait 10 years to collect $380,000 over time? Obviously you want $400,000 today. If you inherited mineral rights, the savings for selling is even more extreme.
Check our are mineral rights taxes article for more information.
Diversification: If you have more than 5% of your net worth / retirement savings in mineral rights, you should diversify. It simply doesn’t make sense to hold mineral rights that wildly fluctuate in value. Sell the mineral rights and put them in a diversified ETF in the stock market.
Simplify your Estate: A very common reason to sell mineral rights in Texas is to simply your estate. Mineral rights are complicated. They create a tax burden on your heirs and dividing mineral rights decreases the value. Over time, as generations pass, mineral rights get further and further divided. Eventually they become so small the value goes down. We frequently help multiple family members who sell as a package to get a better price.
Qualify for Medicaid: You can only have $2,000 in assets to qualify for medicaid. It’s very common for mineral rights to be worth more than that and disqualify someone from Medicaid. Selling mineral rights to qualify for medicaid is very common.
Medical Expenses: If you are in a situation where you need funds to pay for medical expenses, it makes sense to sell mineral rights and use those funds today.
Pay off Debt: If you are paying 20%+ interest rates on credit card debt, there is no reason you should continue holding your mineral rights. When you consider the tax savings of selling along with paying down high interest debt, there is no question you should sell the mineral rights and pay down the debt.
Pay for School: School is an investment, and unfortunately it’s expensive. Take a moment to look at how much money you will make after going to school vs how much money you royalties will generate. Paying for school, or paying down school debt, is an excellent reason to sell mineral rights.
Starting a Business: When you start a business, it takes capital. Selling mineral rights to fund a business start up can make a lot more sense than taking on high interest debt.
Helping a Family Member: There are always situations that come up where a family member needs help. If selling mineral rights will give you the ability to help a family member in need, it can make sense to sell.
There are many other reasons to sell mineral rights in Texas. We recommend taking some time to figure out what your mineral rights are worth and then deciding whether selling makes sense for your situation.