--- title: Do Oil Royalties Qualify for Capital Gains Treatment? description: Learn whether you must pay capital gains taxes on oil royalties or the sale of mineral rights and how to defer capital gains through a 1031 exchange. image: https://www.realized1031.com/hubfs/Do%20realized%20gains%20count%20as%20income%3F-587791288.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # Do Oil Royalties Qualify for Capital Gains Treatment? Posted Dec 12, 2022 ![Do realized gains count as income?-587791288](https://www.realized1031.com/hs-fs/hubfs/Do%20realized%20gains%20count%20as%20income%3F-587791288.jpg?width=750&height=392&name=Do%20realized%20gains%20count%20as%20income%3F-587791288.jpg) Owning rights to oil means you may receive royalties from sales of the oil obtained from a reserve. While you won’t have to pay capital gains on royalties you receive from your mineral rights, you may have to pay them if you sell your rights for a profit.  Learn more about capital gains taxes and oil royalties and how to defer capital gains liability through a 1031 exchange.  ### Capital Gains on the Sale of Mineral Rights  When you sell mineral [rights to oil](https://www.realized1031.com/glossary/crude-oil), you may have to pay capital gains taxes on the profits. You must consider two factors when determining your capital gains liability on the sale of oil rights: how you came to own them and how long they have been in your possession.  Length of Ownership  Capital gains on the sale of mineral rights depend on how long you’ve held an asset. For example, if you owned the oil rights for less than one year before selling, you would report the proceeds as income and pay at your income tax rate.  If you have owned the oil rights for over a year, the IRS considers it a long-term asset, and you will pay [capital gains tax](https://www.irs.gov/taxtopics/tc409). Capital gains taxes rates are based on your income. Anyone making between $40,400 and $445,850 (single) or $80,800 and $501,600 (filing jointly) pays a 15% capital gains tax, and those with income above this range will pay 20%.   Purchased vs. Inherited  The capital gains you pay on the [sale of mineral rights](https://www.realized1031.com/blog/how-do-i-determine-the-value-of-my-mineral-rights) may also vary based on how you came to own the asset. If you purchased the asset, your capital gains are based on how much you sold the rights for versus what you bought them for initially.   If you inherited the mineral rights, your capital gains amount is based on the asset’s value when you inherited it compared to how much you sold it for.  ### Capital Gains Liability for Oil Royalties   Royalties you earn from gas, mineral, and oil properties are [taxed as regular income](https://www.irs.gov/businesses/small-businesses-self-employed/what-is-taxable-and-nontaxable-income#:~:text=Royalties%20from%20copyrights%2C%20patents%2C%20and,\)%2C%20Supplemental%20Income%20and%20Loss.). Instead of paying capital gains tax on royalties you earn from your ownership rights, you’ll report them on Schedule E on your 1040 form as income.   Because these royalties are taxed as income, you must pay federal income tax at your regular rate and state income tax if it applies in your location. For example, if you receive oil royalties as a Texas resident, you will only be responsible for the federal income tax since the state [doesn’t implement](https://taxfoundation.org/state/texas/#:~:text=Texas%20does%20not%20have%20an,tax%20rate%20of%208.20%20percent.) its own income tax. The federal rate is [between 12% and 35%](https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023), depending on your income bracket.   ### Can You Defer Capital Gains on Mineral Rights Sale Profits?  You can defer capital gains on the sale of oil rights through a 1031 Exchange. Typically used in real estate transactions, this strategy is also available for exchanging other assets like mineral rights.   It works by allowing you to purchase a similar or [like-kind asset](https://www.realized1031.com/glossary/like-kind-exchange), such as gas or other mineral rights, with the sale proceeds rather than paying capital gains. With this strategy, you can defer capital gains taxes indefinitely, continually investing in different like-kind assets and building your portfolio.    This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.  Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.  Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.  Download The Capital Gains Tax Calculator [![Cap Gains Calculator For Investors](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/laptop-capital-gains-calculator-spreadsheet.jpg?width=500&height=290&name=laptop-capital-gains-calculator-spreadsheet.jpg "Estimate the cap gains tax owed ...") ](https://www.realized1031.com/blog/do-oil-royalties-qualify-for-capital-gains-treatment#blogform) Download Calculator ---   --- ### Cap Gains Calculator For Investors ![Download The Capital Gains Tax Calculator](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/laptop-capital-gains-calculator-spreadsheet.jpg?width=500&height=290&name=laptop-capital-gains-calculator-spreadsheet.jpg) Estimate the cap gains tax owed after selling an asset or property By providing your email and phone number, you are opting to receive communications from Realized. 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Learn more about capital gains taxes and oil royalties and how to defer capital gains liability through a 1031 exchange. Capital Gains on the Sale of Mineral Rights When you sell mineral rights to oil, you may have to pay capital gains taxes on the profits. You must consider two factors when determining your capital gains liability on the sale of oil rights: how you came to own them and how long they have been in your possession. Length of Ownership Capital gains on the sale of mineral rights depend on how long you’ve held an asset. For example, if you owned the oil rights for less than one year before selling, you would report the proceeds as income and pay at your income tax rate. If you have owned the oil rights for over a year, the IRS considers it a long-term asset, and you will pay capital gains tax. Capital gains taxes rates are based on your income. Anyone making between $40,400 and $445,850 (single) or $80,800 and $501,600 (filing jointly) pays a 15% capital gains tax, and those with income above this range will pay 20%. Purchased vs. Inherited The capital gains you pay on the sale of mineral rights may also vary based on how you came to own the asset. If you purchased the asset, your capital gains are based on how much you sold the rights for versus what you bought them for initially. If you inherited the mineral rights, your capital gains amount is based on the asset’s value when you inherited it compared to how much you sold it for. Capital Gains Liability for Oil Royalties Royalties you earn from gas, mineral, and oil properties are taxed as regular income. Instead of paying capital gains tax on royalties you earn from your ownership rights, you’ll report them on Schedule E on your 1040 form as income. Because these royalties are taxed as income, you must pay federal income tax at your regular rate and state income tax if it applies in your location. For example, if you receive oil royalties as a Texas resident, you will only be responsible for the federal income tax since the state doesn’t implement its own income tax. The federal rate is between 12% and 35%, depending on your income bracket. Can You Defer Capital Gains on Mineral Rights Sale Profits? You can defer capital gains on the sale of oil rights through a 1031 Exchange. Typically used in real estate transactions, this strategy is also available for exchanging other assets like mineral rights. It works by allowing you to purchase a similar or like-kind asset, such as gas or other mineral rights, with the sale proceeds rather than paying capital gains. With this strategy, you can defer capital gains taxes indefinitely, continually investing in different like-kind assets and building your portfolio. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.", "articleSection" : [ "Capital Gains" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2022-12-12T13:00:01+0000", "datePublished" : "2022-12-12T13:00:01+0000", "description" : "Learn whether you must pay capital gains taxes on oil royalties or the sale of mineral rights and how to defer capital gains through a 1031 exchange. 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