Selling MIneral Rights vs. Royalities

I have been getting offers to sell my mineral rights. Last night, I had an offer of $12,000 an acre.  I said I wasn't interested.  But how do I determine which will get me more money--mineral rights or royalties. First of all, I have no way of knowing how much royalties would be if I were to get in a unit. Is there a range of amounts for royalties? How much per acre?  I also heard that these fracked wells have a life of about 7 years, with a dramatic drop off in productions after the first year. Comments?

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Permalink Reply by james coffelt on January 16, 2014 at 5:51am

A few considerations;

Your royalty interests are a bigger number, however, they are taxed at income tax rates, so assume 50%  +/-  is gone.

Selling is taxed as capital gains. The transaction can also be rolled into a 1031 exchange, buying other property, and become tax free.

At 2% inflation, the value of money is halved every 35 years, I suspect real inflation is much higher.

Alternatively, buying another asset, will inflate, and potentially tax free 

25% of leased land is never drilled, so there is risk

It is largely a personal financial decision, how old are you, what would you do with the money, what is your risk tolerance, etc.

Good Luck

Permalink Reply by Susan A Tippel on January 16, 2014 at 6:17am

Thank you.  Yes, I have thought of the tax thing. Selling is a long-term investment and royalties will be taxed as income. That is why I would like to have some idea what the royalties would be worth to make a decision if I need to.   Is it also true that these wells have a lifespan of about 7 years, with a major drop-offs in production during that time?  If that is true I think selling my mineral rights would definitely get me more money what with taxes and all.

Permalink Reply by james coffelt on January 16, 2014 at 7:26am

susan

I believe they will drop off closer to 2 years, not 7.

Based on that assumption, tax rates, inflation, etc, I did an analysis, which ended in a 20 year model, and it ended with selling being better, with less risk, you control the asset.

Good Luck

Permalink Reply by Susan A Tippel on January 16, 2014 at 7:53am

Thank you so much!   I know this is a lot to ask, but can I see your 20 year model?

Permalink Reply by james coffelt on January 16, 2014 at 10:48am

susan

A few disclaimers, I raise cattle, I am not an attorney, or accountant. I own a lot of land and minerals. Email me your email address at Jamescoffelt@Hotmail.com, and I will send my analysis. If I were more computer literate, I would post it here.

see, OhioLandandCattle.com:

PS:

A favorite investment at the moment, is selling minerals, and buying commercial property/apartments, in a 1031 exchange(tax free), the commercial property, in turn, provides an indefinite income going forward, which you control, and is out of risk

Permalink Reply by scott peterson on January 17, 2014 at 1:54am

Decline rates I have seen are more like 6 mos.

Permalink Reply by w. k. chirpas on January 21, 2014 at 12:49pm

Susan,

 

15% royalties are tax exempt.  It is called a deputation allowance. Check with an accountant I may not be up to date for 2014.

Permalink Reply by scott peterson on January 21, 2014 at 12:54pm

The a holes in DC are trying to take that away. I sure hope they dont succeed!

Permalink Reply by w. k. chirpas on January 21, 2014 at 1:02pm

I think "holes" should capitalized!

Permalink Reply by scott peterson on January 21, 2014 at 1:21pm

A HOLES!

Permalink Reply by WranglerRouser on January 21, 2014 at 2:17pm

Please elaborate, I have never heard of a deputation allowance.

Permalink Reply by w. k. chirpas on January 21, 2014 at 2:19pm

yes my spelling needs to be corrected.

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