What are “Mineral Rights?”

I have written several blog entries on allocating the purchase price of land into “Surface Rights” and “Mineral Rights.” Past customers of mine have structured their purchase agreement in that manner. It is clear that surface rights are not depreciable, at least I/we have not yet come up with a way to do it (there must be one – if you figure it out, please let me know). But, past customers have depreciated the mineral rights over a five-year period (not to be confused with depletion, which is taken when the extraction is in progress).

In one case a customer bought a $2,100,000 hunt camp and depreciated $1,500,000 of it over a five-year period.

But what are mineral rights? This definition comes from the State of Michigan Department of Environmental Quality web site – along with a disclaimer that it is not legal advice.

A mineral right is a right to extract a mineral from the earth or to receive payment, in the form of royalty, for the extraction of minerals. “Mineral” may have different meanings depending on the context, and there is no universal definition. However, “mineral” generally includes: • Fossil fuels – oil, natural gas, and coal. • Metals and metal-bearing ores – such as gold, copper, and iron. • Non-metallic minerals and mineable rock products – such as limestone, gypsum, building stones and salt. • May also include sand and gravel, peat, marl, etc.

Of course there is much due diligence to be done prior to even entering into a sales contract and that includes consulting with a good tax and/or real estate attorney and accountant.

One other thought; check on the zoning ordinance governing the property in question. If the zoning does not allow extraction of minerals such as peat, gravel, sand, stone, ore, etc., it may be hard to defend the depreciation of mineral rights.

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