In most countries in the world, the government controls all mineral rights; the U.S. is one of the few countries that allow individuals to own mineral rights. These rights have the potential to produce income for the holder in several ways, and people who live in Texas will owe taxes on all income resulting from mineral-rights ownership, and on the future value of those mineral rights.
Types of Mineral Rights Income
In Texas, mineral rights can generate income in several ways. Owners can sell their mineral rights in full or in part, generating income from that sale. Most commonly, mineral-rights owners receive income from leasing the right to explore for and extract minerals to an oil or gas company. If oil, gas or another mineral is discovered on the related land, the mineral-rights owner will receive royalty income on the value of the minerals extracted and might receive a bonus payment when the lease is signed.
State Income Tax
As of January 2011, Texas levies no state income tax. This means that any income received as a result of mineral-rights ownership is not taxable by the state of Texas.
Property Tax
In Texas, mineral rights are taxed as real property, and their taxation for property tax purposes is separated from real estate, according to the Tarrant County Appraisal District. Mineral-rights property taxes are based on open-market prices given the current condition of the market for mineral rights. Prices for mineral rights are based on estimates of future production for each oil or gas well, not on past production. This means that the valuation of mineral rights for property-tax purposes does not relate to the revenue you have received from your mineral rights in the past. Property taxes on mineral rights are due annually in Texas. Individuals can check with the local appraisal district to determine when their property taxes are due.
Federal Income Tax
Individuals owe federal income tax on all sources of income, including that received from mineral-rights ownership. If you receive royalty income from oil, gas or other mineral production, the company that controls mineral production provides a 1099-Miscellaneous form for you after Dec. 31 each year, summarizing your royalty and lease income. The Internal Revenue Service requires that you report this income on Schedule E – Supplemental Income and Loss. The amount of mineral-rights income you report is reduced by any expenses you incur as a result of that ownership, such as legal fees or telephone calls. The income is also reduced by an amount called depletion, which represents the amount by which the mineral reserves are used up through the extraction process. The IRS says you can use either the cost or percentage method to calculate depletion. Check with your tax accountant for advice on which method is appropriate for you.