A land (surface) owner is approached by an oil company to gain right of way to a development site. The company owns the mineral rights and proposes to build a pipeline. The company will pay for the use of the access land, but will not purchase it.
Oddly, the tax law provides that cash received by the land owner for a right of way is not a sale, and therefore it isn’t a capital gain. Nor is it treated as ordinary taxable income. Instead, it is essentially treated as a return of capital; the cost basis in the land is reduced and the right of way payment, which can be substantial, is tax-free.
It is important for the land owner to understand his or her position in this transaction because rarely does one receive money tax-free. The size of the payment may also change the land owner’s personal balance sheet and require careful decisions for financial or estate planning.
Conclusion: Surface owners may receive a sizable payment, tax-free, depending on the value a working interest owner places on access to the development site. The land owner’s tax basis will also decrease.
To view other scenarios and learn more about this topic, visit: Oil & Gas Update: Tax Implications of Buying and Selling Mineral Rights
The oil and gas industry has experienced booms and busts of varying lengths since the dawn of mineral exploration. The current climate for O&G suggests continued consolidation, however forecasts by industry experts anticipate the boom may be back by 2018. For any owners or buyers of mineral interests, the market may be ripe for making deals now — with a careful eye toward the tax implications of buying and selling mineral rights. No two deals are alike, and it’s important to learn the potential tax impact and the types of taxes you may be paying.
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Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.
