How do I report the sale of mineral rights on my tax return?

Recapture is computed first, on Form 4797 Part III, whatever the rest of the gain turns out to be

The Form 4797 instructions list "oil, gas, geothermal, or other mineral properties" among the dispositions the form reports and say that if you had a gain on such property placed in service after 1986 "you must recapture all expenses that were deducted as intangible drilling costs, depletion, mine exploration costs, and development costs under sections 263, 616, and 617." That calculation lives in Part III at line 28, with line 28a collecting the deducted costs and the depletion that reduced basis.

The statute behind the line is section 1254(a)(1): on a disposition of section 1254 property, the lesser of those costs or the gain is ordinary income "notwithstanding any other provision." Royalty owners usually carry only depletion; operators carry depletion plus intangible drilling costs. An owner who never claimed depletion has no section 1254 cost and skips Part III.

If you sold part of your interest, or an undivided share, the instructions send you to section 1254(a)(2), which apportions the recapture to the part sold.

The remaining gain is section 1231 or capital gain depending on how you held the minerals

After line 28 the balance of the gain leaves Part III. Minerals used in a trade or business and held more than one year are section 1231 property under section 1231(b)(1), and the gain joins Part I, where net section 1231 gains are treated as long-term capital gain and net losses as ordinary. Minerals held purely for investment are a capital asset, and the Form 8824 instructions make the same split when an exchange is involved: capital-asset gain follows the Schedule D instructions, business property goes to Form 4797.

Which bucket a royalty falls into depends on your facts. A landowner whose minerals produced alongside a farming business, or who held a working interest, is usually in Form 4797 territory; a passive heir with a royalty cheque and nothing else is usually reporting a capital asset on Schedule D. Decide it with your CPA, because the ordering of losses differs.

Long-term rates in 2026 come from Rev. Proc. 2025-32: the 15% bracket ends at $613,700 of taxable income joint and $545,500 single, with 20% above, and the 0% band ends at $98,900 joint and $49,450 single. Gain from a disposition of property is net investment income under section 1411, so the 3.8% tax applies above $250,000 joint or $200,000 single.

The information returns you will and will not receive

A mineral sale often closes without a Form 1099-S. The Form 1099-S instructions define reportable real estate as ownership interests in land, inherently permanent structures, condominium units, co-op stock and non-contingent standing timber, and exclude "surface or subsurface natural resources (for example, water, ores, or other natural deposits)" when the sale is not connected to a sale of reportable real estate. Sell the minerals with the land and the whole transaction is reportable; sell the minerals alone and the buyer may file nothing.

The gain is reportable from your own records: the purchase and sale agreement, the closing statement, your basis file and the depletion schedule. Royalties received before closing are reported to you on Form 1099-MISC when they reach $10 for the year, per the Schedule E instructions, and they stay on Schedule E line 4 even in the year of sale.

If you exchanged the minerals, Form 8824 comes first and recapture can still appear

An exchange of a mineral interest for other real property is reported on Form 8824 "with your tax return for that year," meaning the year the relinquished minerals were transferred, even if the replacement closed in the following year; the straddle rules are on which year to file Form 8824.

Recapture does not disappear in an exchange of minerals for a building. Reg. section 1.1254-2(d) limits the ordinary income to the gain recognized plus the fair market value of replacement property that is not natural resource recapture property, so an exchange into an apartment DST or a net-leased building triggers recapture up to the value of what you bought, while an exchange into another royalty defers it. The Form 8824 instructions flag the same point: part of the realized gain "may be required to be recaptured as ordinary income" on line 19, and that amount is carried to Form 4797. Where boot and recapture land on the forms is walked through on boot and recapture on Form 4797 and Schedule D.

The substantive rules, including the term-interest and production-payment traps, are on 1031 exchange for mineral rights; the operator’s version is exchanging a working interest.

Hypothetical: a $900,000 royalty sale after $150,000 of depletion

Assume a royalty owner who bought the interest for $300,000, claimed $150,000 of depletion over the years, and sells for $900,000. Adjusted basis is $150,000 and the gain is $750,000. The numbers are round and made up for the mechanics.

Form 4797 Part III, line 28, recaptures the $150,000 of depletion as ordinary income. The remaining $600,000 is section 1231 gain if the royalty was held in a business, otherwise capital gain on Schedule D. At 2026 rates most of a $600,000 gain on a joint return sits in the 15% bracket, with the 3.8% tax above the section 1411 threshold.

Had the owner exchanged the royalty for a $900,000 interest in a net-leased building, Form 8824 would show $750,000 realized and, because the building is not natural resource property, Reg. section 1.1254-2(d) would still require the $150,000 of depletion to be recaptured on Form 4797 while the $600,000 balance is deferred. Exchanging into another royalty instead would defer all of it. Run the two returns side by side with your preparer before choosing the replacement.