rent mineral rights


M

Marion1E

Hi everybody,
My mom has mineral rights in Oklahoma. She does not owe the land. She
received money from an oil company so they can do exploratory
drilling. The contract is for 5 years and she got a onetime payment
for the 5 years of $20,000. Does this go on schedule E and if yes
where on schedule E? Is it considered rent?

Thanks you,

Marion
 
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P

Paul Thomas, CPA

My mom has mineral rights in Oklahoma. She does not owe
the land. She received money from an oil company so they
can do exploratory drilling. The contract is for 5 years and
she got a onetime payment for the 5 years of $20,000.
Does this go on schedule E and if yes
where on schedule E? Is it considered rent?



I see nothing that would indicate an entry to some place other than Schedule
E, and whether it's technically a rent or a royalty probably doesn't change
the end result of the amount of income or how it's taxed. Is there any
additional income to be expected based on any oil actually being extracted
from the property? Does the contract read such that it lends itself to look
more like lease/rent income or royalty income?
 
D

D. Stussy

Paul Thomas said:
I see nothing that would indicate an entry to some place other than Schedule
E, and whether it's technically a rent or a royalty probably doesn't change
the end result of the amount of income or how it's taxed. Is there any
additional income to be expected based on any oil actually being extracted
from the property? Does the contract read such that it lends itself to look
more like lease/rent income or royalty income?
I do: As this is for oil or gas, Schedule C treatment may be
appropriate. This is an exception to the general rule.
 
A

Alan

Hi everybody,
My mom has mineral rights in Oklahoma. She does not owe the land. She
received money from an oil company so they can do exploratory
drilling. The contract is for 5 years and she got a onetime payment
for the 5 years of $20,000. Does this go on schedule E and if yes
where on schedule E? Is it considered rent?

Thanks you,

Marion
There is no way to answer your question without seeing the
contract between the owner of the rights and the oil company that
wants to drill.

Typically, the way this works is that the rights owner signs a
lease with the oil company that provides the company the right to
develop (drill) and produce oil. The lease also typically
contains a provision for royalty payments when the oil is
produced and how those payments will be made. Royalty payments on
oil are typically 1/8 of production but could be higher. Other
terms can vary. The lease is usually for a specific duration of
time.. in your mom's case five years. Usually, when there is no
periodic rental payment in the lease there is a one-time up front
payment for the rights. This is called a bonus. The bonus is
considered to be an advance royalty. Advance royalties are not
subject to any percentage depletion allowances.

So.. the end result is that the payment gets reported on Schedule
E as a royalty payment.

Just to repeat... unless one actually looks at the contract.. one
does not know. As the payment was $20,000, your mom should
receive IRS Form 1099-MISC that should identify exactly what the
payment was for.
 
A

Alan

Alan said:
There is no way to answer your question without seeing the contract
between the owner of the rights and the oil company that wants to drill.

Typically, the way this works is that the rights owner signs a lease
with the oil company that provides the company the right to develop
(drill) and produce oil. The lease also typically contains a provision
for royalty payments when the oil is produced and how those payments
will be made. Royalty payments on oil are typically 1/8 of production
but could be higher. Other terms can vary. The lease is usually for a
specific duration of time.. in your mom's case five years. Usually,
when there is no periodic rental payment in the lease there is a
one-time up front payment for the rights. This is called a bonus. The
bonus is considered to be an advance royalty. Advance royalties are not
subject to any percentage depletion allowances.

So.. the end result is that the payment gets reported on Schedule E as a
royalty payment.

Just to repeat... unless one actually looks at the contract.. one does
not know. As the payment was $20,000, your mom should receive IRS Form
1099-MISC that should identify exactly what the payment was for.
I realized after I sent this that I should not have used the word
"exactly" in the last paragraph. The 1099-MISC will contain the
amount received probably in Box 2 Royalties. However, there
could also be amounts in Box 1 and Box 3.
 
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O

Okla Tax-Aide

Okla Tax-Aide had written this in response to
http://www.rockryno.com/taxes/rent-mineral-rights-18890-.htm :


-------------------------------------
Hi everybody,
My mom has mineral rights in Oklahoma. She does not owe the land. She
received money from an oil company so they can do exploratory
drilling. The contract is for 5 years and she got a onetime payment
for the 5 years of $20,000. Does this go on schedule E and if yes
where on schedule E? Is it considered rent?
Thanks you,
Oil companies should send you a 1099-MISC with the Lease Bonus shown as
Rent on Box 1. If so list it as Rent on Sch E. Line 3. IF Bonus is from
property in OKLA, it's subject to OKLA Income Tax and Oil Company MAY have
with held
6% for taxes
 

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