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Mineral Royalties and Tax Advantages

Updated: Oct 5, 2023

Mineral interests can have favorable tax treatment, and retaining your mineral interests by utilizing Miller Creek Lending can enable you to retain those tax benefits. As with all tax related, please consult your tax accountants and advisors as the information below is not meant to be construed as tax advice.

1. Depletion Deduction - Oil and Gas Royalties and lease bonuses are generally

considered passive income and are typically treated as ordinary income for income tax

purposes. Oil and Gas Royalties though qualify for depletion deduction that reduces the amount of taxable income the mineral owner pays. The Percentage Depletion method allowed by the IRS for depletion of your mineral interests for the life of oil and gas production, regardless of your cost basis. This can result in depletion deductions that in aggregate exceed the cost of your mineral interests, although your taxable value can not fall below $0. This can be a meaningful tax advantage to producing mineral interest owners.

2. Interest Expense Deduction – Interest expense for investment is generally deductible up to the limits of your investment income. Borrowing from Miller Creek Lending produces investment interest expense for the mineral owner, which is generally tax deductible as well.

3. No Capital Gains Tax – Selling your minerals produces a potentially large capital gains tax event for the seller. Retaining ownership of your minerals does not trigger this tax event.

4. Retain Upside - If you sell your oil and gas royalties, you cannot benefit from future

production such as new wells drilled on your property, recompletions of existing wells on your property that enhance oil and gas output. The consideration of these factors is unique to each mineral interest. The professionals at Miller Creek Lending would be happy to evaluate your specific property.

Other Mineral tax resources:

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