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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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

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.

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

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

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

Decline rates I have seen are more like 6 mos.

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.

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

I think "holes" should capitalized!

A HOLES!

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

yes my spelling needs to be corrected.

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