What is the tax I should pay on the sale of a mineral right/oil royalty?

by Susan D. Jarvis, CPA | Oct 16, 2018

I am selling a mineral right/oil royalty. How do I know what the correct percentage is to pay in taxes on the total amount I receive?

You must compare what you originally paid for the mineral right with the sale proceeds, minus direct expenses of the sale. The difference is the gain or loss that gets reported. If the mineral rights have been held for more than a year, then the gain is long-term; less than one year is short-term.

In general, you should set aside 20 percent of the gain for federal taxes and 3.07 percent of the gain for Pennsylvania taxes. This gain/loss will be lumped in with any other capital transactions of the taxpayer in the tax year, which may serve to lessen or increase the amount of tax due. But, in general, the 20 percent and 3.07 percent amounts are what I would advise you to set aside.
You should be sure to consult your tax adviser and not handle this transaction yourself. If the mineral right is held in a limited partnership, the partnership will likely provide you with the information to compute the gain/loss.

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Answered by: Susan D. Jarvis, CPA, is a sole practitioner in Nazareth, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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