California Mineral Leasing Rghts: Retain Your Rights
Geology.com notes that the United States is one of the few countries in the world where individuals, instead of governments, can own the rights to surface and sub-surface minerals, including coal, lignite, oil and natural gas. Each state has different regulations governing mineral rights. In California, the ability to control ownership of and access to mineral resources is separated from ownership of real estate, such as land. Each can be sold independently of the other. In general, there are few downsides to retaining mineral rights when you sell real estate.
Pro: Income Stream
One advantage of retaining mineral rights when you sell land is the potential for future earning streams. According to the state of California Department of Conservation, the mineral rights owner controls whether real estate is drilled or excavated for minerals. If wells or excavations exist on the land, ownership of mineral rights will produce an income stream into the future. If no wells have been drilled or if excavation has not begun on the land, it might not contain minerals of value. However, exploration for mineral rights is an ongoing process, and the mineral rights holder benefits if minerals are discovered.
Pro: Lump Sums of Cash
Reputable exploration and development companies will often offer to buy your mineral rights for a lump sum. This is a common practice whether minerals have been discovered on the real estate or not. You can use mineral rights in this way as a financial planning tool, selling them when you need an infusion of cash for a real estate purchase or to cover other expenses.
Con: Taxes and Financial Planning
The income from mineral production is taxable and can dramatically impact your income and tax levels from year to year as production levels change. Production levels are controlled by the company that leases the rights to excavate or drill for minerals. When mineral prices are low, production might stop, reducing your income. When prices are high, production might be ramped up to extract the maximum mineral quantities while prices are elevated, increasing your income. These fluctuations in income that are out of your control can make budgeting and tax planning difficult.
Con: Record Keeping
Selling both the land and mineral rights alleviates any record-keeping burdens you might have in relation to ownership of mineral rights or taxes on the income they produce. You must retain evidence of royalty income from all mineral rights and report your earnings through the tax process annually. To ensure you receive income on producing mineral rights and have the opportunity to approve any drilling or excavation, you must keep the leasing company informed of changes in your address. While not a great burden, staying in contact with the leasing company when no production is occurring can be frustrating.
Pro: Transferable To Your Heirs
Mineral rights are assets that are transferable during your life or after your death. You can transfer ownership to your heirs before you die, or designate ownership percentages in your will. This is a benefit for future generations as they can receive the income stream from existing mineral production or benefit when exploration identifies retrievable minerals.