Oil Royalties

[jjquantz]

Do any of you have any experiences with oil royalties, especially selling them? DW's grandfather had many small royalty holdings on wells in OK and TX. These are increasingly becoming a pain the patootie. When he dies, they were split up and passed on to DW's mom, DW and DW's brother. Then FIL and MIL created a trust and many, but not all, of the properties were transferred into the trust. Apparently some of them were re-titled in FIL's name as well. Now, even 10 years after FIL's death, properties are being brought to our attention (via offers to buy) that are in MIL's name, FIL's name, and the trust's name. The total income from ALL of these properties is only a few thousand per year, certainly nice, but increasingly not worth the pain of paying taxes, record keeping, complexity of tax filing, etc. We have finally convinced BIL that selling them off is the best thing for his wife's (and my) mental health (we are the ones who handle the money in the family).

So, I believe, based on some research, that the proceeds from selling are to be treated as any other capital gain when they are sold. But it is unclear to me how one goes about establishing the basis for tax purposes. Any experiences out there? Any idea who to contact to find out?

 

[gauss]

...

So, I believe, based on some research, that the proceeds from selling are to be treated as any other capital gain when they are sold. But it is unclear to me how one goes about establishing the basis for tax purposes. Any experiences out there? Any idea who to contact to find out?

If the asset has been held for quite some time (and perhaps appreciated), would the assumption of a $0 basis be terribly inaccurate?

I have used this trick for Stock purchases from the 1970s and 1980s and I understand it to be perfectly legal and appropriate in some cases.

Alternatively if the "step-up" in basis on the date of death to the FMV is appropriate then this may simplify your investigation.


-gauss

 

[jjquantz]

If the asset has been held for quite some time (and perhaps appreciated), would the assumption of a $0 basis be terribly inaccurate?

I have used this trick for Stock purchases from the 1970s and 1980s and I understand it to be perfectly legal and appropriate in some cases.

-gauss

That would be the easy (and expensive) way out. The basis should have stepped up on the death of FIL in 2008 (as with any capital asset, right?) It is entirely possible that the royalties were "worth more" at that time than they are now (West Texas intermediate was at ~$120/bbl then, it is at ~$50/bbl now). I am currently having additional federal and state taxes withheld from DW's paycheck on the assumption that we will have zero basis, but I am very confident that is not the case. I just don't have any real idea how one goes about getting a valuation for this. It's not like a stock where I could look up the stock price on the day of his death, it's more like inheriting a rental property. There is probably some company in Texas that will provide me an estimate, but I haven't been able to find one yet.

The taxes could be significant at zero basis - typical purchase offers are 300x monthly payouts. So even a few thousand per year could lead to total sale proceeds of $100K or more.

 

[gauss]

Did [-]DWGF's[/-] FIL's estate go through probate?

If the oil assets were part of the probate estate then the value should have been documented by the administrator/executor/personal representative.

-gauss

 

[Texas Proud]

If you want to sell, take the offers that come in... even if low...

We have one that is listed in my father's estate, and he died in '80... I know it is going to be a hassle when my mom passes...

I have tried to get any of my sibling to take it for free... no takers (even me)... it pays less than $100 per year... I think it was in the $30+ range this last year....


Now, my oldest sister found out about one that her DH had before he died... she did not know about it... she asked me what to do... I said lets call and see if they will buy it... NOPE, they shut the well and that was that....

 

[whatnot]

DH started getting royalties a few years ago. His grandmother who died many years ago apparently inherited them from her 3rd DH who had died many years before her. So out of the blue DH and his sisters are now owners via his mother who passed 10 years ago. No one was aware of ownership. 3rd DH had sold land but retained mineral rights.
We had been getting $400-$600 a month 4 years ago, but now it is about $200-300.
The offers to buy are $8-10k. We will pass. The money is just fun money and not really a big deal at tax time.

 

[Texas Proud]

DH started getting royalties a few years ago. His grandmother who died many years ago apparently inherited them from her 3rd DH who had died many years before her. So out of the blue DH and his sisters are now owners via his mother who passed 10 years ago. No one was aware of ownership. 3rd DH had sold land but retained mineral rights.
We had been getting $400-$600 a month 4 years ago, but now it is about $200-300.
The offers to buy are $8-10k. We will pass. The money is just fun money and not really a big deal at tax time.

Well, if I were getting that much I would not sell either!!! At the mid point you are talking $6K a month, so and $8K to $10K offer is not even close...

 

[jjquantz]

Did [-]DWGF's[/-] FIL's estate go through probate?

If the oil assets were part of the probate estate then the value should have been documented by the administrator/executor/personal representative.

-gauss

Well, yes, um... None of them were supposed to be, that was why they set up the (talk about another PITA) trust. The latest offer was for a property that was still in MIL's name - she died 15 years ago. The property was never re-titled on her passing, never put in the trust, was not known to be part of the estate. There are likely more properties that are currently unknown. When wells become inactive, the county stops sending out tax notices and then when the owners pass on, the estate has no record of the ownership. Then, all of a sudden, an oil company buys up a field, fracks it, and starts production and a mad search starts for the owners. They are good at finding us, I must admit that.

The main reason we are considering selling them is that the purchasing companies will handle all the title changes. If we wanted to keep some of these "surprise" properties, we would have to find an attorney (and/or landman)in TX or OK who would go to the county courthouse and do the leg work to change the title. Aside from not knowing where to start and who to talk to, the cost of transferring the title for a property that is going to send us $200/year is not really something that we are willing to pursue.

 

[aja8888]

Well, yes, um... None of them were supposed to be, that was why they set up the (talk about another PITA) trust. The latest offer was for a property that was still in MIL's name - she died 15 years ago. The property was never re-titled on her passing, never put in the trust, was not known to be part of the estate. There are likely more properties that are currently unknown. When wells become inactive, the county stops sending out tax notices and then when the owners pass on, the estate has no record of the ownership. Then, all of a sudden, an oil company buys up a field, fracks it, and starts production and a mad search starts for the owners. They are good at finding us, I must admit that.

The main reason we are considering selling them is that the purchasing companies will handle all the title changes. If we wanted to keep some of these "surprise" properties, we would have to find an attorney (and/or landman)in TX or OK who would go to the county courthouse and do the leg work to change the title. Aside from not knowing where to start and who to talk to, the cost of transferring the title for a property that is going to send us $200/year is not really something that we are willing to pursue.

If an oil producer wants to drill a particular existing field, they typically look to buy the old leases and mineral rights to have total control over the production payouts. That's why they do the leg work and make the offers to leaseholders. You would be surprised what some of the older fields in the Permian Basin are producing these days. The Permian, which has been drilled since before 1920, is the hottest new play in the US.

 

[THUNDER_75]

I would suggest if there is a lot of net production to the owners interest (5 bopd, 100 mcfD, ETC) . You might want to have it evaluted by an engineering firm. If you live any of the big cities of Texas, OK, etc it should be easy to find one. They would take the production of the the wells you own and probably do a decline curve analyis of the potential reserves. That would be pushed against an oil/gas price deck, remove any expenses (Taxes, Operating Costs etc) to calcualte the cash-flow and present value. This was what I did for a living.

 

[jjquantz]

I would suggest if there is a lot of net production to the owners interest (5 bopd, 100 mcfD, ETC) . You might want to have it evaluted by an engineering firm. If you live any of the big cities of Texas, OK, etc it should be easy to find one. They would take the production of the the wells you own and probably do a decline curve analyis of the potential reserves. That would be pushed against an oil/gas price deck, remove any expenses (Taxes, Operating Costs etc) to calcualte the cash-flow and present value. This was what I did for a living.

Great advice, if only: 1) we lived in TX or OK, and, more importantly 2) We had a royalty that came ANYWHERE near 5 bopd. We have one where our share has once or twice approached 5 barrels per MONTH, a couple that are on the order of 5 barrels per YEAR and a couple of others who send us a check for $10-$20 every few years just to clear out their books. We really can't justify paying anyone to do anything significant for us. Thus the desire to be rid of the issue.

I'm beginning to think the best strategy is just to sell them off, claim zero basis, suck it up and pay the taxes.

 

[aja8888]

Great advice, if only: 1) we lived in TX or OK, and, more importantly 2) We had a royalty that came ANYWHERE near 5 bopd. We have one where our share has once or twice approached 5 barrels per MONTH, a couple that are on the order of 5 barrels per YEAR and a couple of others who send us a check for $10-$20 every few years just to clear out their books. We really can't justify paying anyone to do anything significant for us. Thus the desire to be rid of the issue.

I'm beginning to think the best strategy is just to sell them off, claim zero basis, suck it up and pay the taxes.

At those low production rates, I'm surprised the wells are still in active status. Although I've seen operators who keep the old wells alive just so they don't have to pay the plugging and abandonment costs.

 

[Texas Proud]

Great advice, if only: 1) we lived in TX or OK, and, more importantly 2) We had a royalty that came ANYWHERE near 5 bopd. We have one where our share has once or twice approached 5 barrels per MONTH, a couple that are on the order of 5 barrels per YEAR and a couple of others who send us a check for $10-$20 every few years just to clear out their books. We really can't justify paying anyone to do anything significant for us. Thus the desire to be rid of the issue.

I'm beginning to think the best strategy is just to sell them off, claim zero basis, suck it up and pay the taxes.

If I could find [-]a sucker[/-] an investor to do that with ours I would... clearly getting rid of it is worth the taxes paid IMO...

Also, you could put down a basis as the IRS will never question the amount... it just does not rise to the level of interest for them....

 

[ERD50]

...

Also, you could put down a basis as the IRS will never question the amount... it just does not rise to the level of interest for them....

Yes, do the best effort of picking a year that it would have seen a 'step-up' in cost basis, make some estimate of its worth in that year (is $/bbl a good proxy?), submit that and retain all the documentation.

Odds are it won't get questioned. If it does, they may accept your documentation, and you are fine. If they won't, you claim zero basis, and you are no worse off.

-ERD50

 

[Texas Proud]

If I could find [-]a sucker[/-] an investor to do that with ours I would... clearly getting rid of it is worth the taxes paid IMO...

Also, you could put down a basis as the IRS will never question the amount... it just does not rise to the level of interest for them....

Just want to add.... the oil company has ours listed as "Estate of XXX" which is my dad... this does not rise to the level where we actually need to file a return... we do put the oil income on my mom's taxes, but in reality we could just ignore it and nothing would ever happen...

Same if we sold it... the IRS is not going to come after the estate.....

 

[jjquantz]

Thanks, everyone, for your comments and suggestions. Just to clarify, for the couple of you with experience in the oil industry, our royalty interests range from .000217 to .000952. So the wells are still producing some reasonable amounts of oil, it's just that our share is so ridiculously small.