Current rates for Selling mineral rights?

We have acreage in union township and have been approached to sell all or part of our rights for about 7000 dollars an acre. This is quite a bit more than other offers we had received. Can anyone tell me if this is a good offer? Any suggestions for how to proceed would be appreciated.

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Permalink Reply by scott peterson on December 12, 2013 at 3:33am

Sale of minerals is taxed as capital gains which is a much lower tax rate than ordinary income which royalties are taxed at. Capital gains depending on your situation are 15-20%.  

Permalink Reply by brat on December 12, 2013 at 4:47am

Thanks scott

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on December 12, 2013 at 5:26am

To piggyback on Scott's point, cap gains is favorable because it treats your mineral sale as the sale of an investment.  So the purchase price of your property (and by virtue your minerals) is the investment and you only pay taxes (at a lower rate) on your gain from said investment.  Conversely, the taxes paid on royalty income (which is the measuring stick that we'll use) will vary year to year and be heavily front-loaded.  So years one and two will likely push you into a higher bracket, depending on production and your total acreage.  Let's say royalty income in year one is $400,000.  That's taxed at 35%.  Let's say year two is half that at $200,000.  That's taxed at 33%.  Selling your rights would be taxed at 23.8% (20% flat rate for long term cap gains, 3.8% Medicare surtax).  So there's some positive tax consequences to selling.  

I always wondered what made people sell or not sell.  The psychology of it is really interesting to me.  

Permalink Reply by evan on December 12, 2013 at 5:42am
I'm fighting that decision now Marcus. Really torn on what to do. But of course I have a lot of circumstances going on. Leaning towards selling a fourth. The thing is I thought about selling a few months ago for 7000 and now it's pushing 13000. I woulda been one pissed off person if I woulda done back in the summer.
Permalink Reply by scott peterson on December 12, 2013 at 5:52am

Torn myself. The offers may or may not continue to go up. My atty thinks they will start going other way first of the year. Very hard decision. The thing that plagues my thinking is if you are lucky enough to be included in a drilling unit....how much of your acreage will be included. What if only 1/4 or 1/2 or whatever is included? 

Permalink Reply by evan on December 12, 2013 at 6:03am
That's exactly it Scott. As of right now only half of my acreage is in a unit and the way my land lays I don't think they can get the rest of it. Therefore it would take many years to make up that difference. That's my biggest thought in selling a part of it. A lot of people don't take that into consideration.
Permalink Reply by TM on December 12, 2013 at 6:04am

Very true Scott. Depending on how the unit is drawn up by the driller and where your property lies within the unit that can and will happen. I wonder what happens to the minerals not included in the drilling unit? Will you ever get paid for them or not?

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on December 12, 2013 at 11:49am

If selling 1/4 would bring you in a decent amount of money and if you are even the slightest bit competent with your investments (if you aren't that's ok, most people are not) then you should be able to more than double your money over a 20 year period.  For me, as a guy who manages his own money and lives for the market game, I'd sell and grow my money myself.  Most people feel differently though and it's a very personal choice.

Permalink Reply by Robert Alexander on December 13, 2013 at 10:26pm

15-20 is only federal rate, also have state at around 6% and now Obamacare taxes of around 4% for those in higher income brackets.

Permalink Reply by Tree Farmer on December 13, 2013 at 6:21am

Brat, surface rights are one of the hot buttons on my list of due diligence things to look into. Having a strong partner in a potential buyer seems important as well, this could allow for the help of a favored nation clause in the sales agreement. But I am reaching on this issue as I have not investigated that thoroughly to date. I would want to limit any surface access so that I am the only one making that decision. You may explore limiting the sale to a certain depth or strata but it will most likely effect the price.

Update...My "big" oil/gas attorney fell flat on their face with an offer that was significantly lower than communications I have already had last year on my own. Then I contacted another Canton lawyer based group in the Carroll county area who also fell short of my own previously achieved benchmarks. Hmmm, odd how it looks a lot like a bait-n-switch, promise the moon and then low ball it. The problem with being a cynic is that it almost always pays off, ha! 

For the record we are talking about 12.5% HBP in Western Orange twsp, Carroll county

Capital gains are the best I can do because the land value has already been deducted as a cost basis against timber sales. There is a cost basis in the land value that can be used against most peoples gains in an oil/gas sale, thus reducing the gain by the cost basis.

Just my humble opinions

Permalink Reply by brat on December 13, 2013 at 6:34am

Tree Farmer...Wonder if you could give your best offer received for the Canton group for your HBP 12.5% acres?   I know they advertize some pretty impressive offers, but I wonder if most of those fiqures are from the southern Gulfport drilling area, not from more northern Carroll and Harrison county  areas.   By the way, did you happen to ask them what their lowest offers have been? (I forgot to ask them).

Permalink Reply by Lisa Johnston on November 23, 2013 at 6:21am
Phillip- can you tell me who that was or who I can contact?

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