How Do I Determine the Value of My Mineral Rights?

The term “mineral rights” means the entitlement to use and profit from any minerals underneath a specific property. Mineral rights may be distinct from surface rights (the right to the surface of the land) and may have a different owner. Minerals may include:

• Precious metals like gold and silver
• Semi-precious metals like aluminum and copper
• Oil and natural gas
• Coal

But usually, mineral rights do not encompass sand, gravel, limestone, or water found below the surface.

The value of mineral rights depends on various factors, including the mineral, the location, whether the right is producing, and more. The rule of thumb is widely accepted as a multiple of three to five times the income the right is currently producing, which doesn’t apply to non-producing rights. Commodity prices fluctuate, making timing a factor when evaluating mineral rights.¹

The value is also affected by the parcel size and the way the rights are held. For example, a unified estate means owning both the surface land and the mineral rights. Conversely, a severed estate divides ownership of the land and the mineral rights, and a fractured estate results in more than one owner of the mineral royalties.

Can I buy mineral rights using a 1031 exchange?

Yes. Oil, gas, and mineral royalties each qualify for "like-kind" exchanges under Section 1031 of the Internal Revenue Code. As with any other property used in a deal, the asset must be held for investment, and you should have owned it for at least one year before selling.

When you execute a 1031 exchange, one essential requirement is to replace the total value of the relinquished property with the replacement asset or assets. That provision is necessary to defer the full amount of capital gains taxes. For example, if you sell a property with a value of $1 million, you must replace it with at least $1 million in value. So, you can use a 1031 exchange to transfer into or out of mineral rights, but that still means you need an accurate valuation, particularly on the replacement side.

Why is getting an accurate valuation challenging?

Even experts agree that the mineral rights market is more art than science. According to the US Mineral Exchange, some of the factors that complicate fair valuations are questions like these:

• What's the current production, and how long has that been sustained?
• How many wells have been drilled (in the case of oil and gas), and how many more are potential?
• What’s the current and trending price?
• What is the nearby permit activity?
• What are state and local requirements?

Unlike buying a house or other real estate assets, mineral rights don't have "comparables" to help the investor assess a fair price. Sales aren’t necessarily publicly available, and each property has individual potential. To determine a realistic price, potential buyers must predict the future royalty income by comparing the current and past productivity to historical norms. That’s why they use a “rule of thumb” to ballpark potential values. Owners should consider using competitive bids to validate any expert valuation estimates.

1 Texasroyaltybrokers.com. “How much are Minerals worth?" October 27, 2021.

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.

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.

Examples are hypothetical and for illustrative purposes only. Withdrawal strategies should take into account the investment objectives, financial situation and particular needs of the individual.

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.