Selling Royalties

Question;  I know you can sell your mineral rights,and even sell just a % of your minerals, but is there such a thing as keeping your mineral rights, and just sell your royalties,or a portion of your royalties? Say you have 60 acres,with a 20% gross lease. Can you sell  20% ,or 1/3 of your royalties? Or is this done by acreage, like 20 acres of royalties, of the 60? Would this be a private agreement between the seller and buyer,or will this be a recorded document at the courthouse? Also, how would this be done by the O&G co.? And what about Taxes?    These questions will probably have to be answered by an attorney,but I was hoping a landman,or landowner who has done it, would answer to avoid attorney fees.

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Permalink Reply by Philip Thackray on May 31, 2015 at 8:08am

A royalty is an income stream.  Transferring that to some one else would constitute a gift from the IRS viewpoint.  You would have to sell the underlying income generator - the mineral rights or the property itself.  As long as you control the income generator the IRS will treat the income as yours.

Phil

Permalink Reply by bo boboski on May 31, 2015 at 8:34am

interesting.   Makes sense too!

Permalink Reply by Philip Thackray on May 31, 2015 at 9:27am

Bo,

As a landowner receiving royalties I'd like to funnel the royalty money to my children with their lower tax bracket.  Can only be done if I transfer the mineral rights or the land with mineral rights to them.

For the above and similar circumstances the question you are asking comes up all the time.

Phi

Permalink Reply by Jack Young on May 31, 2015 at 1:19pm

Not actually true - you can always sell a royalty interest separately from the oil and gas rights. And the tax consequences are generally reasonable and predictable. Just see a good oil and gas attorney and they will be able to structure the sale any way you like. Every variation has been done numerous times before - we've bought and sold royalties, fractional oil & gas rights and fee interests, and you can make deals that end when a particular lease ends, based on the life span of one of the parties, or for a term of years. It's all completely doable and any good attorney will be able to guide you through this.  

Permalink Reply by bo boboski on May 31, 2015 at 1:53pm

well, thought I got my ?s answered now I'm totally confused.

Permalink Reply by Jack Young on May 31, 2015 at 5:15pm

Not surprising - this is a legal question and the average person here wouldn't be aware of how a non-standard situation like this gets handled. Your lawyer (if they really understand oil and gas law) will be able to draft a document that does whatever you want it to do. That needs to be recorded, then you'll notify whatever company is paying you the royalties currently so they can adjust those payments going forward. This isn't something many landmen will have experience with, but was very common in the traditional oil producing areas and so experienced lawyers there will have done it before. It won't be that expensive either - it's just a matter a drafting a slightly more complicated deed or assignment. Good luck with it!

Permalink Reply by Dexter Green on May 31, 2015 at 10:41am

There is a company in Carrollton that buys royalties.  Gateway Royalty, LLC.  They buy a portion of the royalties on a parcel-by-parcel basis, either current or future, and it is recorded at the courthouse.  

Permalink Reply by Philip Thackray on May 31, 2015 at 10:52am

I stand corrected!

Perhaps the limitations I am referring to apply to related individuals.  Selling to Gateway would be an "arms length transaction" and that is why it works.

Phil

Permalink Reply by Dexter Green on May 31, 2015 at 11:18am

It's considered a capital gain since you're selling an investment that creates income.  It's not much different than selling an annuity or a bond.

Permalink Reply by bo boboski on May 31, 2015 at 10:56am

Now it's getting REALLY interesting!

Permalink Reply by Tim on May 31, 2015 at 11:52am

Any accountants out there?

Very interesting topic.  I would like to get a CPA's viewpoint on tax implications; both on 'gifting' to heirs, as well as selling ORRI on a producing mineral right tract.  Any CPA's care to chime in?

Permalink Reply by catt on May 31, 2015 at 12:01pm

You have to deed off the minerals from the land in order to sell a portion of them. But you should see an oil and gas attorney for more legal advice. If you wish to give the mineral rights to your children....there are several ways to do this one is a family trust and also you can gift a child up to  $10,000.00 a year and also the same amount to their spouse. Or contribute to a college fund for grandchildren.

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