rent mineral rights

Hi everybody, My mom has mineral rights in Oklahoma. She does not owe the land. She received money from an oil company so they can do exploratory drilling. The contract is for 5 years and she got a onetime payment for the 5 years of $20,000. Does this go on schedule E and if yes where on schedule E? Is it considered rent?

Thanks you,

Marion

Reply to
Marion1E
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wrote

I see nothing that would indicate an entry to some place other than Schedule E, and whether it's technically a rent or a royalty probably doesn't change the end result of the amount of income or how it's taxed. Is there any additional income to be expected based on any oil actually being extracted from the property? Does the contract read such that it lends itself to look more like lease/rent income or royalty income?

Reply to
Paul Thomas, CPA

I do: As this is for oil or gas, Schedule C treatment may be appropriate. This is an exception to the general rule.

Reply to
D. Stussy

There is no way to answer your question without seeing the contract between the owner of the rights and the oil company that wants to drill.

Typically, the way this works is that the rights owner signs a lease with the oil company that provides the company the right to develop (drill) and produce oil. The lease also typically contains a provision for royalty payments when the oil is produced and how those payments will be made. Royalty payments on oil are typically 1/8 of production but could be higher. Other terms can vary. The lease is usually for a specific duration of time.. in your mom's case five years. Usually, when there is no periodic rental payment in the lease there is a one-time up front payment for the rights. This is called a bonus. The bonus is considered to be an advance royalty. Advance royalties are not subject to any percentage depletion allowances.

So.. the end result is that the payment gets reported on Schedule E as a royalty payment.

Just to repeat... unless one actually looks at the contract.. one does not know. As the payment was $20,000, your mom should receive IRS Form 1099-MISC that should identify exactly what the payment was for.

Reply to
Alan

I realized after I sent this that I should not have used the word "exactly" in the last paragraph. The 1099-MISC will contain the amount received probably in Box 2 Royalties. However, there could also be amounts in Box 1 and Box 3.

Reply to
Alan

Okla Tax-Aide had written this in response to

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------------------------------------- snipped-for-privacy@comcast.net wrote:

Oil companies should send you a 1099-MISC with the Lease Bonus shown as Rent on Box 1. If so list it as Rent on Sch E. Line 3. IF Bonus is from property in OKLA, it's subject to OKLA Income Tax and Oil Company MAY have with held

6% for taxes

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