When you’re first learning about mineral rights investing, you likely think in terms of earning royalty interest. This is when your cost is typically limited to your first investment and then you earn royalty checks by simply owning the mineral rights. However, another type of investment has to do with working interests. This is when the investor takes more of a hands-on approach and is directly liable for many of the costs associated with the work done to explore, drill and produce minerals. There are pros and cons to each, but we are going to take a closer look at working interest investments.
Understanding Working Interests
In most situations, investors will receive a percentage of ownership from the operations an oil company participates in. While this could result in a much more lucrative investment, it also comes with a higher risk due to the expenses associated with the agreement. There are a few different types of working interests, including direct participation, standard working interest, specified properties or a blind pool. Each type has different aspects to understand when it comes to oil and gas mineral interest, so working with an expert to break them down is important.
How Taxes Work on Working Interest Income
The majority of working interest income is treated as self-employment income by the IRS. Investors may be responsible for making tax payments throughout the year, so keeping up with your check stubs and other documentation is critical to avoid unnecessary penalties. The good thing about working interest investments is certain operating costs could be tax-deductible. These deductions could range from the purchase of equipment to standard operating costs.
Are Working Interests Worth The Risks?
There are never any guarantees that Oklahoma minerals will eventually be lucrative. Having some diversification in your portfolio is a wise strategy. Working interest investments are much riskier than standard royalty interests, but the potential payouts are much higher as well. Every investor has their own risk tolerance, so speaking to an expert in mineral rights investing can help you decide whether working interest investments are worth it to you.
Eckard Land and Acquisition works with high net worth investors and investment companies to maximize and diversify their portfolios. Working interest investments make sense for some investors, but not for others. We will take a look at your entire portfolio to determine whether the potential return fits with your investment strategy and risk tolerance. There is no one-size-fits-all answer when it comes to mineral rights investing, so contact us today for expert advice regarding your portfolio.