10 Ways You Can Maximize Your Minerals
Perhaps you are new to the mineral ownership circle or are a seasoned veteran. There is something here for everyone. Knowing and understanding how to get the maximum return on your mineral interests will help you better understand what you need to do to become more successful.
Determine what you own
This might seem like a basic task, but this is something that many people often overlook. A mineral title that has been passed down through several generations can become very complex and convoluted over time.
Your primary defense when it comes to avoiding potential problems when it comes to being compensated properly for the mineral production that occurs is not only knowing what you own, but also having the documentation to prove it.
Pay your taxes
One of the most common mistakes made by mineral rights owners is failing to account for taxes. There are many states where producing minerals are taxed at a county level with an ad valorem (property) tax. You should research your county’s tax liability and keep up to date with your obligations.
There are certain areas of the country where government entities have, in the past, foreclosed on mineral owners as a result of delinquent taxes. You should also check at the state and federal levels to ensure that you are paying the proper income taxes.
The following are the types of taxes you should know about when it comes to understanding royalty taxes:
- County Ad Valorem Tax – these are taxes that are levied at the county level and are basically a property tax on mineral rights, similar to a tax that you would pay on your place of residence.
- Federal Income Tax – according to the IRS, royalty revenues are treated like an ordinary income and are therefore taxed as such.
- Depletion Allowance – this allows you to reduce the amount of taxes you owe on your mineral rights and royalties. Because minerals are finite, and the source will eventually run out, the IRS does allow owners to deduct up to 15 percent of their income from their mineral interests.
- 1031 Exchange for Mineral Rights – this allows you to defer paying capital gains taxes on the sale of oil and gas minerals.
Research the oil and gas production process
There are far too many owners who lack a basic understanding of the steps that are involved in the production process for both oil and gas. In order to be the most successful owner, you should take the time to learn the production and marketing processes. If you make yourself familiar with some of the terms and the basics of the industry that will definitely help you when it comes to negotiating a lease.
The first thing that happens in the production process is drilling. Once the drilling process has finished, it is then that it is determined if the site is a viable spot to put a well. If it is then the products needed to make the well are purchased and installed. If it is decided that the drilling location is a dry hole, it will be plugged and abandoned. This process can take anywhere from a few weeks to a few months.
Once the well is completed it will be tested to determine the producing characteristics. Once the testing has been completed, with the exception of oil, a pipeline from the drill site will be completed. The pipeline can be anything from a simple connection to an already existing pipeline to a brand new line that requires the laying of miles of pipeline.
When the decision to build the well is made the oil company will prepare a legal document known as the Division Order. This document says that the decimal ownership interest in the company believes is attributable to a specific owner and requires the owner to sign the document. Once all of these steps have taken place is when the oil and gas production phase actually begins.
Negotiate a quality lease
If you are given the opportunity to lease your minerals it is only common sense that you would attempt to negotiate the best deal possible for you. There are many times when owners are focused in on the lease bonus amounts and completely miss the other aspects that create a well-rounded lease.
The main thing to remember when you are trying to maximize your mineral assets is to focus on the terms of the oil and gas lease, the royalty percentages, and finally the lease bonus. Keep in mind that there are not “standard” leases that are used.
The following are just a few things that you should not do when it comes to negotiating a mineral lease: -Don’t jump on the first sight of an oil and gas lease
- Don’t say things that you are not willing to stand behind during negotiations
- Don’t rush to hire a lawyer
- Don’t spend money that you do not have
- Don’t sign something without reading over all of it
- Don’t warrant the mineral title
- Don’t respond that you are not interested
One of the biggest things to watch out for during lease negotiations is the unrestricted use of fresh water.
Use the internet
The internet is your best resource. It is full of sites that are overflowing with information for oil and gas mineral owners. You can find out anything from individual well production to in-depth coverage of issues relating to mineral rights.
There is a forum specifically for oil and gas mineral rights owners called MineralRightsForum.com. This site is designed to be an online gathering place where you can ask questions about anything that is related to mineral rights.
Keep records and royalty statements
Like anything in the business world, you should keep detailed records. Keeping records of the royalty checks from production is an especially good idea. This will come in handy when you go to file taxes, record past production, and can help you to learn the value of your property if you decide to sell your mineral rights. If you have multiple interests, you should consider using a spreadsheet or online management software to keep all of your records in order.
Know the current activity in your area
Maintaining knowledge about drilling operations in the area is a major benefit to mineral owners. You will be able to negotiate much better lease terms if you are up to date with what is happening in the area. There are websites for the various state oil and gas regulatory agencies which give information about drilling permits as well as other informative data.
Plan for the next generation
In order to keep the value of your mineral rights up you should avoid splitting the interests between multiple heirs. Try to pass the whole mineral tracts instead of sub-dividing them further. One way you could go about doing this is to pass on the mineral rights to a child who is more financially savvy or has a background in real estate, while passing on other assets to your other children.
Make yourself findable
If someone is trying to contact you, they will most likely search the county property records to find mineral owners. You should try to keep yourself fairly findable. Think about these things: Are there different variations of your name in the public records? Have you ever been divorced or married that could cause a name change? Are you known by a nickname but on the record you are listed by your legal name? Think about it this way, if a reasonably diligent person can locate you through public records you should be ok, if you have to think too far into the questions posed above you may want to consider looking into making yourself more findable.
Seek legal aid
If you are looking for legal aid for your mineral rights cases visit weatherfordlawcenter.com. Andrew R. Carruth and Carissa King have extensive experience in oil, gas and mineral law. They have the experience that it takes to hand oil and gas title examinations, mineral and surface disputes, as well as, oil and gas liens and bankruptcy issues.
Call today to discuss your oil and gas legal needs
contact us to discuss how to optimize your mineral ownings