Offers to sell mineral rights should be considered carefully: Part 2
Landowners and mineral owners in Michigan are receiving offers to sell rather than lease their mineral rights. Part 1 defined “mineral property” and “partnering together” with the buyer.
April 16, 2014 - Author: Curtis Talley Jr., Michigan State University Extension
This article continues the discussion of the short term and long term considerations in evaluating to purchase rather than lease non-producing mineral property.
- A sale is usually a “forever” transaction; once sold they are gone. A mineral lease can be long term if there is mineral production, or shorter if the acreage is not part of a drilling unit that produces royalties. Continual ownership may provide the opportunity to lease multiple times and receive multiple bonuses.
- An exception to “forever” is the Michigan Dormant Minerals Act. this act, severed oil or gas rights revert to the surface owner after twenty years, unless certain actions have occurred within the 20-year period since the deed was recorded.  A mineral owner in Michigan should be aware of this law as it may provide an opportunity to reclaim the mineral rights if the buyer does not comply with this law.
- Who Can Sign an Oil and Gas Lease? states how the ownership deed is structured determines who has the right to sign the sales contract. For example, if the land is held as joint tenants, all joint tenants must sign the contract. If one is unwilling to sign, no agreement can be consummated.
- Offers to purchase frequently tout the sale will “reduce” risk. It might reduce the risk of receiving no royalty income in the future, but what about the future sale of the surface without mineral rights? Will a sale of mineral rights affect future marketability of the surface? If mineral production, such as oil and gas wells are present but the surface owner is not receiving royalties, the marketability of the surface may be negatively impacted. On the other hand, intact minerals with royalty income can be attractive to certain surface buyers, as it provides additional cash flow.
- The buyer is not obligated to continue ownership after a purchase is made. As with the oil and gas lease market, whatever is purchased can be re-sold to another buyer for potentially more than the purchase price.
- Outright sale vs. a lease bonus. Mineral purchase offers may advertise that a sale produces immediate cash income. The bonus (up-front cash payment) for signing an oil and gas lease also provides immediate income. Lease bonuses can range from $15 per acre to as much as $6,000 per acre, depending on location and lease demand.
- Income taxes. Purchase offers may advertise that the sale proceeds will be taxed as long-term capital gains ( 2013 tax rates are 0 percent to 20 percent depending on taxable income vs. 10 percent to 39.6 percent for earned income.), if the property has been owned for at least one year. Taxation can be a little more complicated than that. Capital gains taxes are paid on the profit from the sale. For example, if you sell a share of Exxon for $150, bought it for $100 and owned it for more than one year, the long term gain is $50 (profit). You pay tax only on the $50. For a mineral rights sale, the calculated capital gain will be based on the basis assigned to the mineral rights when you purchased the land, which may be “0”. If the basis is “0”, the entire amount of the proceeds would be taxed as capital gain income.
- Technology in the mineral extraction industries is constantly changing and improving. Areas that were once thought to not have economic mineral development potential are now being developed. The owner of the mineral rights at the time of development is the one receiving their portion of the income.
Because of the complexities of a mineral rights sale, Michigan State University Extension recommends that a knowledgeable oil and gas attorney with experience working for private landowners be consulted to assist in understanding a sales contract. An oil and gas educational web page provides free educational materials including “Oil and Gas Expert Resources for Private Landowners,” which includes a list of attorneys that have stated they have a specialty in mineral rights. There are also other downloadable resources related to oil and gas leasing, mineral rights and links to related web pages.
Other articles in this series:
Offers to sell mineral rights should be considered carefully: Part 1