If you’re considering selling your mineral rights in Texas, it’s important to understand how the sale is taxed — and how that differs from the taxes you might pay if you continue to receive royalties.
Taxes can have a meaningful impact on your bottom line. This article explains how the IRS and the State of Texas treat mineral sales, what “capital gains” means in this context, how ad valorem property taxes work, and what to expect (or not expect) when it comes to 1099 forms.
Selling vs. Holding: How They’re Taxed Differently
In Texas, continuing to hold mineral rights and receive royalties is treated very differently from selling those rights outright.
- Ongoing royalties or lease bonuses are taxed as ordinary income by the IRS — just like wages or business income.
- Selling your mineral rights (transferring ownership of the minerals in exchange for a lump sum) is treated as the sale of a capital asset, generally subject to capital gains tax instead of ordinary income tax.
- Texas has no state income tax, which means you’ll only owe federal income tax on the sale — not a separate state tax.
However, Texas mineral owners do pay ad valorem property taxes (county-level taxes) on producing mineral interests. These are assessed annually by county appraisal districts and are based on the appraised value of the minerals still in the ground. That means even though there’s no state income tax, producing minerals are still subject to local property taxation.
Federal Capital Gains Treatment
When you sell your mineral rights, the key factor is your gain — the difference between what you receive and what’s called your tax basis in the property.
- Tax basis is typically what you paid for the mineral rights, plus any acquisition costs.
- If you inherited the mineral rights, you likely received a step-up in basis — meaning your basis equals the fair market value at the time of inheritance, which can significantly reduce your taxable gain.
- Holding period matters too: if you’ve owned the minerals for more than one year, your profit is taxed at long-term capital gains rates, which are generally lower than ordinary income rates.
Example
Suppose you inherited mineral rights in 2015 valued at $60,000. You sell them in 2025 for $180,000. Your taxable gain is $120,000 (sale price minus basis). Since you held the rights for more than one year, the gain qualifies for long-term capital gains tax — usually 15–20% for most taxpayers — rather than your higher ordinary income rate.
Understanding Ad Valorem (Property) Taxes on Minerals
While Texas does not levy a state income tax, counties do assess ad valorem taxes on producing mineral interests. Here’s how it works:
- Each year, the county appraisal district estimates the value of the reserves still in the ground based on current production, prices, and decline.
- That appraised value is used to calculate your property tax bill for producing minerals.
- The tax is typically deducted by the operator from your royalty payments and remitted on your behalf, but you remain responsible for ensuring payment is made.
If you sell your minerals, the buyer becomes responsible for future ad valorem taxes, while you remain responsible for any portion owed during your period of ownership.
In other words: even though Texas doesn’t tax income from the sale, you still pay property tax on the production value of your minerals while you own them.
What About 1099 Forms?
Many mineral owners are used to receiving a Form 1099-MISC or 1099-NEC from operators each year reporting royalty or lease bonus income. That’s because those payments are ordinary income under IRS rules.
However, when you sell your mineral rights, the transaction is treated differently.
- A sale of mineral rights is considered the sale of real property, not the payment of income.
- Because it’s a capital asset transaction, buyers do not issue a 1099-MISC or 1099-NEC to the seller.
- Instead, the seller is responsible for reporting the sale directly on their federal tax return — typically on Form 8949 and Schedule D, which are used to calculate capital gains or losses.
This can surprise some sellers who expect to receive a 1099 in January after a sale closes. The absence of a 1099 doesn’t mean the transaction isn’t taxable — it simply means the responsibility for reporting falls entirely on the seller.
If you’re unsure how to report it, a CPA can help ensure the sale is properly reflected as a property transaction, not ordinary income.
Other Ordinary Income Items That Remain
If you’re still receiving income from a lease or production before selling, those payments are treated differently:
- Royalties and lease bonuses earned before the sale remain ordinary income for federal tax purposes.
- Production taxes (severance taxes) and ad valorem taxes may be deducted by operators before your net royalty payment, but they do not affect your income tax treatment.
- Once you sell the mineral interest, those future royalty and tax obligations pass to the new owner.
Common Pitfalls to Avoid
A few common issues often surprise mineral owners:
- No record of basis: If you can’t prove what your minerals were worth when you acquired them, the IRS may assume your basis is zero — increasing your taxable gain.
- Short-term ownership: Selling within a year of acquiring the minerals results in short-term capital gains, taxed as ordinary income.
- Misunderstanding ad valorem taxes: Many owners are caught off guard when they receive property tax bills even though Texas has no state income tax.
- Expecting a 1099: Because mineral sales are treated as property transactions, sellers won’t receive a 1099 — but they still must report the sale to the IRS.
- Mixing lease income with sale proceeds: Lease bonuses and royalties are income; sale proceeds are capital gains. Keep them separate for accurate reporting.
- Forgetting local obligations: Counties assess taxes based on production through the end of the year; you may still owe for the portion of the year you owned the minerals.
Key Takeaways for Texas Mineral Owners
| Tax Type | Applies When | Description |
|---|---|---|
| Ordinary Income Tax | You receive lease bonuses or royalties | Taxed as regular income by the IRS |
| Capital Gains Tax | You sell mineral rights held >1 year | Taxed at lower long-term capital gains rate |
| Ad Valorem (Property) Tax | You own producing minerals in Texas | Annual county tax on appraised value of remaining reserves |
| Severance Tax | Production occurs | Paid by the operator and deducted from revenue before payout |
| 1099 Reporting | Sale of mineral rights | No 1099 issued; seller reports the transaction as a property sale |
The Bottom Line
Selling your mineral rights in Texas can simplify ownership and may even reduce your long-term tax exposure — but it’s not tax-free.
- You’ll likely owe federal capital gains tax on the profit from the sale.
- You’ll continue to owe ad valorem property taxes on producing minerals for the time you still own them.
- You will not receive a 1099 form for the sale, since it’s a property transaction, but you are still responsible for reporting it to the IRS.
- Texas’s lack of a state income tax helps, but documentation, timing, and transaction structure all affect your outcome.
Before you finalize a sale, it’s smart to consult a tax professional familiar with oil and gas ownership. A few well-documented details — like your basis, holding period, and local property tax records — can make a big difference in how much you ultimately keep.
This article is provided for informational purposes only and should not be construed as legal or tax advice. Always consult a qualified CPA or tax attorney for your specific situation.