In what jurisdictions are you liable for income taxes and real estate taxes?
The answer lies in the place you consider to be your main home and where the source of income is derived.
In relation to gas and oil income related activities, you need to look at where the mineral or surface property, known as real property, is located. Most of the time, you think of real property as land or your house. Mineral interests are also considered real property in many states, including WV.
What is Source Income?
Income derived from real property located in a State, such as
- Gas and oil leases
- Royalty income from mineral interests
- Pipeline-related income such as an easement or right-of-way
- Sales of real property including mineral interest sales
Where is it taxable?
- Taxable to the State where the Property is Located
- Regardless of your residency
Example: A North Carolina resident receiving a gas lease bonus on mineral property located in WV means the lease bonus is taxable to WV and reportable on a WV non-resident tax return. The NC resident will receive a tax credit on their NC resident return for the taxes paid to WV.
You are only taxed in the state or county where your property is located not where the well is drilled or where the well lateral extends to.
There are wells drilled in WV and the lateral ends in PA, to which mineral owners will receive PA 1099s with PA taxes withheld because PA has a non-resident withholding law. If the mineral owner’s interest is only in WV and they have no property beyond the WV state line then they are not subject to PA taxes. You would file a non-resident PA return and get the money back. If your property line does not extend into another state, then you don’t owe that state anything even if there is a 1099 tax document that shows income to that state. The taxability lies where the property is located.
The same logic goes for real estate taxes, you only pay in the county where your property is located. WV taxes mineral interest as real property like your home and land. You will only be subject to real estate taxes in the county where your mineral property is located, not where the well was drilled or where the horizontal lateral extends. For example, all of your mineral property is located in Ohio County, WV but you are receiving production royalties from a well drilled in Brooke County, WV which is a county north of Ohio. You are only subject to Ohio County real estate taxes and should not be responsible for any taxes to Brooke County.
It is important to know the location of your property and what jurisdictions the property lies within. It is also important for your tax preparer to be aware of these facts as well. We find that many mineral owners, especially when they use tax preparers who do not understand gas and oil activities, are not aware of their jurisdictional tax responsibilities and do not correctly file state income tax returns based on the source income.
Tax expertise in the area where your mineral and surface properties are located is important when choosing a tax preparer. Choose a tax preparer who knows the producers, is familiar with the royalty statements, and knows the local issues and taxes. Jeffrey Yourkovich CPA, CMM is the gas and oil tax expert in the Ohio Valley.