Mineral rights can be taxed on both state and county levels. The county level tax is levied through ad valorem, which is Latin for “according to value” and is billed and pain only once a year. In some states, including Texas, the ad valorem tax is only applicable when the minerals are generating income and is paid alongside the state severance taxes.
Since mineral rights are categorized as real property, they are taxed according to their estimated “fair market value”. This refers to the amount (or price) that a willing buyer will pay for a mineral interest in the current market conditions when it is being sold in the open market. Just as with any person, those with mineral rights want to pay as minimal a tax as possible, and this often means lowering the fair market value. In order to maintain fairness, the state of Texas mandates an appraisal method where the market value of where a mineral rights owner is appraised county ad valorem tax is through the value of the discounted cash rate of the discounted cash flow as projected for future production. County ad valorem tax is not included in income tax in last year’s revenue.
The mineral rights owner will be given an estimate on the value of their minerals each year around March given by the county appraisal district. This would provide the mineral rights owner the chance to view their profits and determine whether they would want to sell mineral rights or keep them to get royalties. It is important for the mineral rights owner to talk with those who know how these process works in order to avoid legal complications and not get scammed from your profits. Because county tax and state tax is different, and it is not included in the income tax, many mineral rights owners get confused and end facing legal problems. It is therefore recommended to talk with someone who specializes in mineral rights in order to avoid such difficulties and get the most from their mineral rights.
One of the most difficult things for most mineral rights owners that have no intention or capacity to do mining themselves is to decide is whether to sell or lease their rights. Some stress in no uncertain terms that selling mineral rights is the worst thing under any circumstances based on a limited set of facts. The truth is, the wisdom of selling your mineral rights depends on many factors.
Location is of course one of the most important factor in the valuation of any real property, including mineral rights. As stated on the The Mineral Auction website, the price will depend on the perceived potential of profit. For example, if your mineral rights are located in proximity to locations known to produce profitable amounts of natural gas, oil, or marketable minerals, then it will drive the price up. The reverse is also true.
The rule of thumb is, it is better to lease if you are sure that the land will produce because you will royalties. However, if there is no certainty that the land will produce, it may be a good idea to sell, especially in states where dormant laws (inactive mineral rights may revert to surface owner after a certain period) are in effect. Texas has no such law, but mineral rights in areas that are a considerable distance from known deposits may never be worked at all, so it would make some money with no repercussions to you when you sell your mineral rights.
Another big question is whether the offer is reasonable or not. Like in any business, you need to know which way is up, and that’s not easy when it comes to mineral rights. Don’t be afraid to ask around. Consult with two or more professionals that know the ins and outs of the business and compare their quotes to make sure that you get the best possible deal.