Make no mistake; selling your mineral rights can bring you a pile of cash. There are times in life when that extra infusion of money tastes sweet. But when the IRS sticks their hand in your stash of cash and grabs a chunk, that leaves a bad taste in your mouth.
We all know the government is going to get theirs, but how do you legally limit the amount they take? The tax code is full of provisions to help you negotiate these choppy waters. One such strategy to help you sail through swiftly is how the IRS handles capital gains.
First of all, take note; this article deals only with the taxes associated with "selling your mineral rights." This does not apply to leasing your mineral rights and the subsequent royalty payments, which come with that (which are most often treated as "ordinary income"). For information on that tax labyrinth, you can check out the IRS "Oil and Gas Handbook."
When you sell your mineral rights, you give up control of the resources. You release your claim to any on-going royalty payments. You walk away from all the ownership tax implications involved with the oil and gas mineral rights. Congratulations! You've just unloaded a ton of potential tax problems. However, one very significant tax issue just landed in your lap, and it's called capital gains taxes.
Phoenix Capital Group offers services to help mineral rights owners understand their opportunities in both retaining and cashing out of their ownership positions. Here, Phoenix Capital Group describes how to solve tax problems when selling your mineral rights.
Capital Gains Tax
There are two types of Capital Gains tax: short term and long term.
- Short term - this tax event occurs when you've owned the mineral rights for less than a single year. In this case, the profit you made from the sale is taxed as ordinary income. This is dependent on your tax bracket:
Rate | For Single Individuals, Taxable Income Over | For Married Individuals Filing Joint Returns, Taxable Income Over | For Heads of Households, Taxable Income Over |
10% | $0 | $0 | $0 |
12% | $9,875 | $19,750 | $14,100 |
22% | $40,125 | $80,250 | $53,700 |
24% | $85,525 | $171,050 | $85,500 |
32% | $163,300 | $326,600 | $163,300 |
35% | $207,350 | $414,700 | $207,350 |
37% | $518,400 | $622,050 | $518,400 |
Source: Internal Revenue Service (2020 rates) As you can see the rate can vary between 10% and 37% depending on your overall income. | |||
- Long term - when you've held the mineral rights for more than a year and sell them, then the IRS designates that tax event as long-term capital gains. This type of tax event is levied at either 0%, 15%, or 20%.
The best way to understand capital gain tax rates is to quote directly from the IRS. So here you go.
"The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than $78,750.
A capital gain rate of 15% applies if your taxable income is $78,750 or more but less than $434,550 for single; $488,850 for married filing jointly or qualifying widow(er); $461,700 for the head of household, or $244,425 for married filing separately.
However, a net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.
There are a few other exceptions where capital gains may be taxed at rates greater than 20%:
1. The taxable part of a gain from selling Section 1202 qualified small business stock is taxed at a maximum 28% rate.
2. Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
3. The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.
Note: Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates."
The bottom line is you can pay vastly different rates of taxes depending on what tax bracket you are in. The more income you've made that year, the higher your taxes.
The Solution to Paying Higher Taxes
Have you ever heard of installment sales? Well, if not, welcome to the party! This won't help everyone, but if you are in between tax brackets and the sale of your mineral rights pushes you into a higher tax bracket, you're just giving away a portion of your profits to the IRS. If you could keep the difference, would you? If you said "yes," then the installment sales strategy is for you.
How Does Installment Sales Work?
Essentially what happens is that you negotiate your payment schedule for selling your mineral rights. Depending on where your income level is for the particular year you sell, you designate how much of the agreed-upon sale price you receive. Taking only a portion of the overall payout keeps you in a lower tax bracket and, thus, reduces your tax liability. The result? You keep more of your money, while at the same time, you have a steady income stream in the upcoming year(s). To sweeten the deal even more, some companies will offer interest on the deferred amount!
Not every person or company who purchases mineral rights offers the installment sales benefit. Also, a word of caution, make sure the company you are working with is solid, and have that program already in place. You'll want to deal with a mineral rights buying company with expertise in tax advantages and planning. Phoenix Capital Group will save you the time. Their team understands installment sales and offers above-market interest rates.
Follow the installment sales strategy and enjoy the sweetness of keeping more of your own money.
About Phoenix Capital Group Holdings, LLC:
Phoenix Capital Group offers services to help mineral rights owners understand their opportunities in both retaining and cashing out of their ownership positions. Phoenix Capital Group also provides opportunities for people to partner with and invest alongside the Company. Their focus is on educating, serving, and guiding their clients with integrity and humility.
If you would like to better understand your options from a friendly industry professional, give them a call at (213) 316-8720.
