Severed mineral interest due diligence for Michigan self-directed IRA property

A deed can convey the land, the buildings, and the right to lease the house, and still leave the oil and gas under the parcel in someone else's name. That is the ordinary situation behind a phrase that rarely appears in a listing description: a severed mineral interest. For a self-directed IRA buying property in Michigan, the question is not whether the minerals will ever be developed. It is whether the rights under the surface are recorded against the title, who holds them, whether the state's dormancy rule has already settled the question, and what the account has to do to keep the deal inside the prohibited-transaction rules if the answer is yes.

The issue matters because the interest travels with the land. The IRA does not buy a clean slate. It buys what the grantor held, subject to every recorded reservation and lease in the chain of title. If a gas lease from the 1960s is still in that chain and nothing recorded since has changed it, it is still there.

How a mineral interest gets severed

Michigan has produced oil and gas for more than a century, and the state's early oil and gas activity generated a heavy volume of mineral conveyances that have since been assigned, leased, and subdivided. When a deed or a later recorded instrument reserves or excepts the mineral estate, the minerals and the surface become two separate estates held by different people. The surface owner holds the land. Someone else holds the right to explore for and produce the minerals, and usually a royalty on any production.

The split rarely happens all at once. A 1950s deed may reserve the gas to the seller's family, a 1970s assignment may move the interest to a different person, and a 1990s lease may grant drilling rights to an operator in exchange for a bonus payment and a royalty fraction on future production. Each recorded step adds a link. That is why the review works backward through the deed chain instead of stopping at the seller's current deed.

• The current deed and every earlier deed that grants, reserves, or excepts a mineral estate
• Recorded oil and gas leases, assignments, and transfers of the mineral or royalty interest
• Unitization or pooling agreements that combine tracts for development
• Declarations or notices recorded by a mineral owner to preserve a dormant interest
• Release or termination documents that end an earlier lease or interest

Where the title commitment puts the minerals

The title commitment is the first place the mineral question surfaces. A reservation in an old deed usually appears as an exception, and a recorded lease appears as an exception or as a requirement, depending on how the title company handles it. The entry on the face of the commitment is a pointer, not an answer. It names a document and its recording information. The answer sits inside the recorded document: what was reserved, who it was reserved to, what the lease permits, what it pays, and whether it has been assigned since.

Two things are worth asking the title professional to confirm in the chain. One is whether any exception names a mineral owner, because a named holder is easier to verify than a blank. The other is whether the chain contains a gap, an unclear assignment, or a conveyance to an entity that no longer exists, because those are the places where a dormant-interest question becomes a real legal question instead of a paperwork question. The commitment also shows what is not recorded. A mineral owner who never recorded a lease or a notice leaves no entry at all, and that is where the state's dormancy rule and the public well records do the work.

The twenty-year dormancy rule for oil and gas

Michigan's Dormant Minerals Act, Michigan Compiled Laws section 554.291, addresses severed oil and gas interests that have sat unused. Under the statute, an interest that has not been produced, sold, leased, mortgaged, or transferred for twenty consecutive years lapses to the surface owner unless the mineral owner has taken a step that keeps it alive. A recorded sale, lease, mortgage, or transfer of the interest restarts the period, and a mineral owner can also record a notice to preserve the interest. How the act applies to a particular chain of documents is a legal question, and the buyer's Michigan attorney is the one who answers it for the specific parcel.

The rule cuts both ways in a purchase review. If the chain shows a mineral interest that has been quiet for more than twenty years with no recorded activity, a dormant-interest analysis may support treating the minerals as belonging to the surface owner. If the chain shows recent production, a new lease, or a recorded notice, the interest is almost certainly live, and the account should understand what the lease permits before it buys. Either answer changes what the IRA is buying, what it can expect on the surface, and sometimes the price.

Check the state's public oil and gas records

Michigan keeps public records of oil and gas wells, including location and completion information, and the county recorders hold the recorded leases and assignments. A quick review of whether any wells have been completed on or near the parcel, whether they are producing, and who the operator and the mineral owner are is a fact check that no title commitment provides by itself. The records do not decide legal questions, but they tell the attorney and the title company which documents to pull and which ones to stop looking for.

For a West Michigan property the check is worth doing even when the listing says nothing about minerals. The state's production history is not uniform, and parts of the region have active or historical gas development. A parcel marketed as quiet acreage can still sit under a recorded lease that has been assigned to a royalty company the seller has never heard of.

Keep the account out of the mineral deal

When the minerals are severed from the surface, the royalty belongs to the mineral owner, not to the IRA that owns the surface. The account's exposure is different: surface damage, access, and the possibility that a recorded lease lets the operator use the land with little day-to-day involvement of the surface owner. If the minerals happen to be owned by the same entity that holds the surface, the account holds both estates, and the flow of royalty and lease income becomes a different question for the custodian and the CPA.

The prohibited-transaction rules apply to either situation. If the operator, the mineral owner, or the royalty manager is the IRA owner, a spouse, a family member, or a related business, a lease or surface-access agreement between the account and that person is a prohibited transaction. An arm's-length agreement with an independent operator, with the compensation paid into the account and the account remaining the only party in control, is the shape the custodian will want documented. The IRA holds the asset and receives the income through the property manager or the custodian's process, the same way it receives rent. It does not run the mineral business itself.

• A surface-access or lease agreement signed with the IRA owner, a relative, or a related entity instead of an independent operator
• Royalty or bonus payments flowing to a personal account instead of the IRA
• The owner or a family member performing drilling, survey, or repair work for the mineral operation
• A lease term or royalty fraction the account accepts without the CPA reviewing the tax treatment
• A recorded lease that names a disqualified person without a written prohibited-transaction review

Rental property and fair housing

If the property is a Michigan rental, the mineral question stays a property-level question. HUD states that the Fair Housing Act prohibits housing discrimination because of race, color, national origin, religion, sex, familial status, or disability. Leasing, screening, maintenance, and accommodation decisions follow those rules plus Michigan and local protections. A drilling operation on the parcel does not change who can be screened in or out, and the property manager should keep the mineral file separate from the tenant file.

Build the mineral file before the offer

The mineral review is pre-contract work. The attorney reviews the deed chain and the lease documents. The title company confirms which interests will be exceptions. The state records confirm what is actually on the ground. The custodian confirms how a surface-access agreement, a royalty stream, or a mineral-related expense would be approved and paid. Each answer is a fact about the account and the parcel, not a prediction of what the minerals will do.

• Pull the full recorded mineral chain: deeds, reservations, assignments, leases, releases, and recorded notices
• Have the attorney identify the holder of any live interest and the lease terms that apply to the parcel
• Check the state's public oil and gas well records for wells on or near the parcel and confirm production status
• Confirm with the title company which mineral interests are exceptions and how the proposed policy will treat them
• Send any live lease or surface-access structure to the CPA for the tax review and to the custodian for the prohibited-transaction review
• Document the accepted resolution, the remaining exception, and any price or contingency adjustment in writing before closing

This article is educational, not legal, tax, financial, title, surveying, fair-housing, retirement-plan, or investment advice. No property, mineral interest, lease, structure, or strategy is approved or endorsed by the IRS. Have your own self-directed IRA custodian, CPA, Michigan attorney, title professional, and other advisors review the account, the mineral chain, the proposed use, and the transaction before taking action.

What Rennie can coordinate

Primary sources for the public-rule portions of this review include Michigan Compiled Laws section 554.291, the Dormant Minerals Act, Michigan's public oil and gas well records, HUD's Fair Housing Act overview, and the IRS retirement-plan investment and prohibited-transaction guidance. They describe the general framework. The answer for one parcel, one chain of recorded documents, and one retirement account comes from the current documents, the public records, and the buyer's own qualified professionals.

Rennie can help identify West Michigan property and coordinate the real estate documents, the title company, the surveyor, and the offer deadlines that this review needs. The mineral chain, the dormant-interest analysis, the lease review, and the account-level decisions stay with the buyer's own attorney, title professional, custodian, and CPA.