Should you lease or sell your minerals? While some would rather have an upfront payment, others would rather lease their minerals. While no one way is right for every mineral owner, there are a plethora of pros and cons that every mineral owner should know and understand before making their final decision.
Leasing provides financial security because continual payments will be made. However, there are some circumstances when leasing is not as fruitful as a person had hoped.
- Leasing has the possibility of providing a lasting income. Monthly payments are made when minerals are producing profits and if a large deposit is found, income levels will rise.
- Leasing allows the mineral rights to be transferred to other family members. Passing down mineral rights to children or relatives will yield them a potential income every month.
- Tax planning may be very difficult when leasing is involved. When the markets are high, drilling may occur more often, raising income levels and raising a person’s tax burden. However, when the market price is low, production may be low and a person may drop in their respective tax bracket.
- Keeping monthly records of royalties earned will be present with leasing. This means with monthly fluctuations, more planning and tax burdens are introduced.
- Monthly incomes will fluctuate. Some months may be fruitful, while other months yield very little income.
Selling minerals is a safe investment and will yield immediate income. While this is favorable for retirement or when a large investment needs to be made, there are also some downfalls compared to leasing.
- Cash is given upfront when minerals are sold. These values are much higher than when leasing takes place and will provide instant financial relief.
- Taxes need to be done once. With capital gains tax being applied, it is much easier than the typical monthly income being applied.
- Once the minerals are sold, no further profit will be seen.
- There will be no passing down of mineral rights to heirs and there is no chance of monthly income being made.
- If more minerals are found on the land than the previous valuation included, money will not be made from these findings once the minerals have been sold.
While utilizing and profiting from minerals is important to do immediately, the two methods of producing income are drastically different. Those that need immediate cash and do not want to worry about their next month’s income will find that selling their minerals is the best choice. However, those that like the possibility of monthly royalties being paid and the ability to profit off of production levels will find that leasing is the better option.