Mineral  Taxes Explained                                                                                              
The federal income tax deadline has passed but, believe it or not, 2013 property tax assessments – including those for mineral rights owners – are under way.  Mineral owners whose natural gas production started in 2013 will receive a new tax assessment. 

In Texas, the surface estate – your home and your land – is separate from the mineral estate.  If you have leased your minerals and they are being produced, you will receive a separate tax statement.  As with surface property taxes, you will receive a notice of value from the county appraisal district and the actual tax bill in the fall. [Note: OSNA members will have producing gas well(s) yet]

The process used to determine mineral taxes breaks down into a few steps.

  1. Your county appraisal district requests information from each well operator about potential revenue from each well that came into production.  As a well operator in the Barnett Shale, the company reports the requested data to each county office.
  2. A taxable value is then calculated from that reported data.  Both the operator and the mineral owner pay taxes on the mineral production in the proportion they own.  Generally mineral owners have 20% -25% of the tax liability on their share of minerals in the unit, and the operator typically pays 75% - 80% of the taxes for the entire unit.  (A unit is a collection of land tracts grouped together to produce minerals from a larger geographical area.) Therefore, operators have a vested interest in negotiating a fair and proper value.
  3. The gas company has a team of legal professionals and tax experts who negotiate directly with county tax offices before the notices of value are sent to mineral owners.  While the company professionals do not directly represent mineral owners, the taxation team works to assure conservative assessments, which results in lower mineral taxes for all mineral owners.
  4. Based on the negotiated value, the county notifies each mineral owner of the taxes on his or her share of the entire producing unit.  In Texas, taxes are not assessed on the mineral property until it is part of a producing unit.

Helpful Hints

  • Minerals become taxable on January 1 following the date the natural gas well is completed and producing natural gas.  In other words, if your unit came on line any time in 2013, the minerals become subject to tax on January 1, 2014 and you will received a notice of taxable value.
  • Some mineral owners may receive tax bills for multiple jurisdictions such as cities, counties or school districts even if the mineral property they own is in a single county or single school district.  That’s because mineral interests are determined from the unit as a whole, not from the individual properties within the unit. So if the unit you are in crosses a county line and includes two school districts, you will receive four tax bills, regardless of where your property is.
  • Typical tax breaks that are offered on the surface estate are not applicable to the mineral estate.  For instance, there is no homestead exemption, and churches and other nonprofit organizations are not exempt from paying mineral taxes. The good news, however, is that minerals taxes decline each year, while surface property taxes usually remain stable or increase.  That’s because the minerals are taxed on their remaining value, which decreases through production.

 Mineral Owner Responsibilities

  1. Be prepared to pay mineral taxes directly.  Property taxes for your home may be included in your mortgage payments and paid by your bank, which is not necessarily the case with mineral taxes.  Property taxes are not deducted from your royalty checks.  (Note: Royalty payments are also subject to ordinary income tax, and income tax is not withheld.)
  2. Taxes are not contingent on royalty payments. It is possible, although not usual to receive a tax statement that is higher than your royalty payments if you had wells shut in for some portion of the year.  This could happen if producing wells were temporarily turned off while new wells were being drilled on the same site.  When the well resumes production, royalty payments will resume and the balance will be restored.
  3. As with most public proceedings, there is an appeals process.  If you have questions or would like to appeal the negotiated amount in the notice you received from the county tax office, you have some options.  Questions about your taxes should be directed to the county tax collector.  To save time when discussing your mineral taxes with us or an outside expert, have your lease number and all pertinent tax assessments handy.

 

Additional Resources

  • Consult your county’s tax office website or call to schedule an appointment.
  • Contact your personal financial advisor or review your notice of taxable value with a certified public accountant.

Map: Wedgewood neighborhood drill site areas.

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