Pros and cons of Leasing Mineral Rights

By | December 1, 2011

Mineral rights are the grants to the land owner so that he can explore, extract and sell the mineral resources like valuable rocks, minerals, oil or gas which are found beneath his property. There are two processes which are involved in drawing income from these rights. One is leasing the mineral rights and the other is selling them completely to the oil and gas companies. Each method has its own pros and cons which again depend upon different factors that affect the minerals. For now let us talk about the pros and cons of leasing the mineral rights to another party.

Advantages of leasing: Leasing is a continuous process and also a consistent way to earn income from your rights. However, your minerals should be of high quality and quantity and only then they are called as producing minerals. Instead of selling your rights for single time lump sum amount, you can earn a consistent income and also can enjoy the benefits of increased prices.

Minerals are an asset and you can proudly pass them to your heirs, provided if they are producing. This way, not only you, your future generations can also enjoy the income from royalties.

Downsides of leasing: Leasing is beneficial only when you are confident about the mineral quality and the quantity. Even though your are getting huge benefits from mineral rights, the income on the mineral rights is taxable and can dramatically impact your income year by year as the production levels increase. Moreover, the income form leasing the rights is not constant, it varies according to the amount of production and the price of the minerals at that point of time, which makes your tax planning complicated.

Also, with the leasing of mineral rights it is essential to keep the records of each and every transaction which includes income on the royalties, bonuses, tax paid towards royalties and much more. This is a great burden to maintain and needs a person to assist you.