Why Sell
Seller Advantages
Why Should I Consider Selling My Oil and Gas Rights?
You may prefer a lump sum of cash instead of smaller payments over time.
Some owners decide to sell mineral rights because they’d rather have a larger up-front payment now and not have to wait for years to collect an equivalent amount in royalty or bonus payments. They sell their mineral rights in order to pay down mortgages, high-interest credit card balances, medical bills and other expenses. Others decide to sell their mineral rights and invest the money in other assets such as real estate or stocks and bonds. Still others decide they’d rather just “cash out” and have the freedom to travel or take that special vacation now, rather than later.
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The IRS code further provides the taxpayer with a means of capital gains deferral through the use of Section 1031 of the code. Basically, what the code states is that when you sell your mineral or royalty interest you may defer the capital gains applicable to the sale provided that you purchase a like-kind” property of equal or greater value which includes minerals, royalties, oil and gas working interests and real estate. If the sale price of your property is greater than the purchase price of the replacement property then you are required to pay capital gains on the difference. The IRS allows up to 45 days after the sale of your property for you to identify the new investment property, and then 180 days between the sale of your property and the purchase of the new property.
1031 exchanges are complicated transactions and require extensive documentation. There are trained individuals called Qualified Intermediaries available for hire and are necessary for the completion of such transactions.
No matter how good a producing well is, it will eventually stop producing as the field it’s in becomes depleted. Once that happens the mineral rights will be virtually worthless. Since it’s hard to predict exactly when a well or field may become depleted, many people decide at some point to convert some or all of their mineral properties into other assets such as real estate, stocks, bonds and other investments that may hold their value longer, or may appreciate more than their declining oil and gas interests.
Some mineral owners in good areas are able to lease their mineral rights many times over the years without a well ever being drilled, and some receive quite a nice bonus every few years from doing so. Eventually however, they too will see a decline in lease bonus rates due to declining opportunities for production in their area. New drilling technologies do occasionally bring an old area “back to life” but once the oil and gas is really gone, it’s gone. This is why mineral rights are classified as “depleting assets.”
Often, it is easier to liquidate mineral rights held by an individual prior to actually having to probate their estate. If the individual owns mineral rights in more than one state their estate would need to be probated in each of them in order for title to pass to their heirs in most cases. In addition, if the individual resides in one state at the time of their death, bit owns minerals in another, their estate would also need to be probated in the state where the minerals are located in order for title to pass to their heirs. This can result in a lot of expense for an estate, and thus the heirs. It is much easier to distribute cash assets to heirs than it is to divide up property after someone passes away. Many individuals decide to sell for this reason, especially those with smaller interests.
Some mineral rights owners, especially those with smaller interests, decide that their mineral rights just don’t justify the hassle of ownership any longer. They would rather spend their free time doing something other than managing mineral interests that may not be making them much money. Eliminating the paperwork associated with mineral ownership can also significantly simply your tax returns each year.