Would someone please inform me (in the simplest way possible) what taxes one would pay if selling mineral rights in Texas using the following example:
The minerals were inherited and have been owned by the party for more than one year.
The minerals are producing.
The owner of the minerals files a individual tax return and makes less than 20k per year for ALL income, not just the royalties from the producing minerals.
The selling price of the minerals is in excess of 400k.
What all taxes are to be paid, at what % and to whom.
You need a good CPA who knows Oil and Gas. Since they have been owned for more than a year, you would be subject to long term capital gains. Your cost basis is the value of the mineral at the time of inheritance.
You might also consider a 1031 tax exchange, again talk to a good CPA
Generally, If you live in Texas and only file a federal tax return, then you will report long-term capital gains of the difference between the sales price and your basis. The tax rate on your other income may be affected by such a large gain. If you are on social security, then you may add more taxes due to that. Do not forget that ObamaCare tax may now affect your total taxes due. If you live in another state and file a state income tax return, then you will most likely pay taxes to your state and how those taxes are calculated depends on state law. You might consider paying the state taxes in advance as estimated tax so you can deduct them on Schedule A for the year of the capital gains, but that depends on the exact situation. You should consult with a tax advisor on the exact number because it all depends on the exact details of your situation No one can give you an exact dollar figure because there may be complications or other facts which affect your tax rates.
Don't forget to to cover the property taxes for the mineral interest. Typically the owner as of January 1 of each year will be the listed owner for property taxes in that year. Appraisal Districts may vary. You may want to include in the contract for sale that the buyer is responsible for property taxes, including the year the interest is sold (where it may be listed in the seller's name).
As a property owner in Texas, I need some help here. I know that understanding property (surface/minerals), just surface property and just minerals is confusing to most all of us; but, to my knowledge, minerals aren't even considered as a separate taxable line item. Again, as far as I know, the CAD just considers the surface acres or the value of the surface based on their evaluations. Since I don't have any producing wells, I really don't know exactly how they access the value once production starts.
If you can shed some light on this, it would be appreciated.
Technically speaking, minerals are included in the value of the surface. The value is $0. Once the lease is signed, you divide the property into two distinct estates. Mineral and Surface. The lease conveys the minerals (mineral fee-determinable interest) to the operator. In exchange, you now have a royalty interest.
Royalty, Overriding, and Working Interest are assessed for property taxes. We call this "mineral" interest but they are actually "variations" of mineral interest (per court cases and Attorney General opinions), to be exact. We use the term "mineral" loosely.
If you have production in Texas, you should have mineral tax accounts in your name at the appraisal district and tax office. It is only taxable if the market value is over $500 total. This is not based on actual income, but rather the market value of the income stream (discounted cash flow). They project income (including decline of production) in future years, based on previous year's average monthly sales price, and then use a discount factor back to present worth. I believe the typical estimate is using 5 years or projected income, and then include the other factors I mentioned. Bottom line, make sure if you have royalties coming in, that you have associated "mineral" (royalty) tax accounts in the county (or counties) you have production in. Sometimes we have wells that cross between counties, which results in bills arriving from one or both counties. That $500 rule sometimes eliminates the appraisal on one side. Some wells may be 90% in one county, and 10% in another. Another issue I see is that some taxing jurisdictions (like a school) may be collected by a county different than the one your minerals are in. For instance, you get a tax bill from the county your minerals are in, for all taxes except the school. Then you get a tax bill for only the school taxes from the next county over. This happens frequently. Let me know I can answer any additional questions. You can also friend request me and I can send you some PDFs and other guides that go into much greater detail.
Thanks for the reply. My point was answered in the first sentence. At the rate we are going right now in my area, sadly, I don't believe we will be needing to understand how the CAD evaluates minerals under production.
Thanks again for keeping us informed. We appreciate your time.