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 Jim OConnor on October 12, 2015 at 8:18am

Its Depletion and its 15% of the TOTAL royalties received.

e.g. if you received 100,000 in royalties 85,000 would be taxed as

ordinary income

Permalink Reply by brat on January 16, 2014 at 10:36am

James,  I'm thinking you are referring to the 1031 Starker Exchange?  I would like to confirm if that is possible with a royalty sale.  Also, is it true that this exchange has to happen within 60 days?

Permalink Reply by james coffelt on January 16, 2014 at 11:10am

Brat

I do not know what a starker sale is.

Gas and Oil interests, and royalty interests, are real estate, as much as the surface is. When sold, they have their own deed, which can be exchanged, for any other deed, in a 1031 tax free exchange. Please have certainty, mineral interests can be exchanged for other real estate, i.e. a deed for a deed, I have done numerous transactions, identical to what we are discussing.

I believe you have 60 days after closing your sale, to identify the purchase, but 6 months to close. Most sales have a 60-120 closing, add 60 days to identify a purchase, and 4 more months to close, and there is plenty of room to work with, i.e. 3 months to close the sale, plus 6 months to buy, is 9 months. 

Permalink Reply by evan on January 16, 2014 at 12:48pm

James you say that selling your royalty interest is capital gains also.  I need to find out if this is the case because if so that's what I may do

Permalink Reply by james coffelt on January 17, 2014 at 12:51am

Evan

Selling your minerals, provided you have owned them a year, is capital gains, with certainty. In Ohio, that would mean 15% Federal on the first 400k, and 20% over 400k, State is 7%, and Obamacare is 3.8%. Please confirm these numbers with your accountant.

Now then, part of that income can be considered basis in what you paid for the land, and is therefore nontaxable.

The entire transaction can be tax free, if you roll it into other real estate. One caution on exchanges, many mineral deals are signed, and never close. Be careful when purchasing real estate to be used in the exchange, to have some provision to extend the closing, in case the sale does not close, and the process must start over. 

And one other nuance, is it is now possible to lease the rights first, and then sell the royalty interest after it is leased, and the sum of the 2 total more than the sale of unleased minerals.

Because the transactions are planned, and take place in close proximity, both transactions are taxed as a sale (this is fairly aggressive, be advised)

For example, a sale of unleased minerals might bring 10k, or they could be leased for 6k. However, lease them first for 6k, and sell the royalty interest for 8k, for a total of 14k. Most buyers of minerals prefer leased minerals, as they have cleared title, and have a higher probability of being drilled.

 

Permalink Reply by Jimmy Wilson on January 17, 2014 at 2:40am

Hey James,

Do you worry about giving up control of the surface ?

How have you covered yourself on future tax increases for your surface, you know as well as I , the good local politicians are going to classify your future drill pads as industrial land and any pipe line easements as well, plus not too mention the massive tax increases coming from the mere increased land valuations this whole process has caused.

By giving up complete control most folks would not think to cover themselves for any future occurrences.

Just my humble thoughts.....

 

Permalink Reply by scott peterson on January 17, 2014 at 2:47am

You can sell the deep mineral rights & retain surface rights. That is pretty typical.

Permalink Reply by james coffelt on January 17, 2014 at 2:55am

Jimmy

Scott is correct, of the minerals I have sold, none have required control of the surface. However, you bring up a good point. If / when they come to drill, and need a pad, they will pay the surface owner for the pad placement, and part of those negotiations should be their requirement to pay the differences in property tax

Permalink Reply by Jimmy Wilson on January 17, 2014 at 3:54am

I'm certain you have seen the old coal sale assignments from the 40's and 50's.... folks gave up carte blanche ingress and egress surface rights with those sales, that's my point.

I was offered 15,500 per mineral acre, however, I, have not seen the contract for the potential sale of that asset.

I can't imagine anyone paying that amount of money and not being granted ingress and egress to the surface.

 

 

Permalink Reply by evan on January 17, 2014 at 4:23am
James I saw your answer to my question thanks. I was confused about part of it I guess. I asked if selling your royalty interest not your mineral rights is still considered capital gains. I saw where you said it earlier yesterday. I'm just trying to make sure cause that's the route I'm gonna go if this is the case. Thanks
Permalink Reply by skittles on January 17, 2014 at 2:12pm

Evan, you can buy one of those new motels or better yet build your own at your exit. LMAO!

Permalink Reply by evan on January 17, 2014 at 2:16pm
Heck no Katie I'm moving to the sticks and closing the gate

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