So I inherited mineral rights in 2021. From a grandfather I didn’t know I had until searching for my father on Ancestry.com. My Father had died before I found out who he was. As it turns out the oil company was trying to tie up the title on it and made contact.
In Reeves I inherited one half of 316.97 acres of the south section156,block13 22.5% in 39.62125 net acres I get paperwork with the checks that say gas, oil and plant products
.
I have been on here reading what I can find about taxes. I am just as confused as ever.
I have never had to pay taxes as I have been way below the poverty line all my adult life. So I have never filed.
With the money that has been coming I have been saving to buy a home. I am about ready.
I’m still going to be under the poverty line once its spent. I think this because I got the first check under 10,000. Then the next was like 17,000. Then it was 15,000 every month less now my last was 10.
So my first question is even though prices are going up at least here in Ca. why do the checks keep getting smaller? I’m going to move out of Ca. (like everybody else) and getting a pretty cheap home with a low tax base because I’m afraid it’s just going to stop. Does anyone know?
The next question is are the IRS going to want me to pay taxes even though I spent it on a home? It’s confusing because it sounds like some people get money back and some are worried about paying.
I would sure appreciate any answers or direction someone could give me. Thank you for you time.
You need to get some good accountant advice before making a big decision to move. But as a lay person, I can say that yes, you are most likely going to have to pay federal taxes on the royalties and you may also have to pay state production taxes for Texas and California may want their portion as well since you live there now. Will depend upon your total royalties per year and your filing status. You may also have to pay quarterly taxes next year even though your income may be less, so be ready for that!
The IRS wants their portion first, so do get some professional advice on how to handle your new income. My advice would be to not buy a home until you get this figured out with a professional accountant as free advice from a website is only free advice and just a suggestion.
The wells normally decline in production over the life of the wells. So as the volume goes down, your revenue may go down as well. If the prices go up while the volume goes down, you may look okay for a little while but eventually will decline. Horizontal wells decline very rapidly, but can last for a long time at low volume rates.
Building on others’ comments, all O&G production income is taxable. But everyone’s situation is unique. If I were you, I would put aside 25% of these checks with the idea that that will be going to pay some sort of tax bill. Then talk to tax return specialist (e.g., H&R Block) when the time comes to file. I am not an expert on taxes, but the above comment is safe advice that I have followed in similar situations over the years.
As to the declining check amounts (and I am an expert on this). Reeves County (Tx) new production that is taking place today will typically show a rapid production (and revenue) decline over time before settling out to a much lower - but steady - long term production rate.
One can imagine a large balloon with a small leak - the volume coming out at first will be large, but it will decrease over time as the pressure drops.
Based on my experience in this part of the oil patch, you will see about a 50-60% decline in production / revenues over the first 12 months (i.e. Month #12 will be only 40-50% of the amount of Month #1).
After about 3-4 years, you will see monthly production flatten out to a point where the monthly production / revenues are in the 10% range of the Month #1 amounts.
Of course, varying O&G and products prices will impact what you get.
Last comment - plant products are items like propane, butane and other liquids stripped out of the natural gas flow.
Yes, everyone will have their hand out, California included, I’m sure. It;s not easy to find a good accountant well versed in O&G who works for rates the average mineral owner would think normal. I think Rock_Man was being conservative in his estimate. It’s better to have the cash on hand to write the check for peace of mind. I’ve had tiny issues with the IRS, I never want a big one.
Hi Jacqueline - I also own minerals in Reeves County. I have tax accountant prepare my taxes every year for the IRS. The royalty payments are included on Schedule E and they claim a depletion allowance. I don’t know anything about California taxes though. My tax guy says I can take one trip a year to the property and write off the trip, so talk to someone sooner than later if you are planning to see the property.
Congratulations, based on what you say you own you are now a millionaire. and take it from me, figuring this all out is a good headache to have. Message me if you want.
Same as RockMans. You are going to pay taxes on the revenue. You could, hypothetically, sell it all to someone today and use a 1031 exchange (moving from one kind of real estate into another) to put the profits into a house and avoid taxes on the capital gain (which will be the full amount since your cost basis is zero). But that is probably not getting the most revenue out of this. So, yeah, you are going to get a 1099 each year and pay fed taxes. You just need to put the royalty income in your 1040 Sch E. Its not very hard on the Fed level. I don’t know anything about California state taxes but your Texas state production taxes will already be taken out. Your Texas county taxes, you will have to pay those. You’ll just get a bill from the Reeves county tax assessor. It will be around 2% of the total production value you received in the past year.
My engineering $0.02
This is the reason I felt inclined to say anything here. This acreage is in the TallCity Stork 156-155 unit. There is a single producer in that unit. As folks say, the revenue from that well is going to decline (quickly) over time. See plot below on the left. The thing nobody has said is that TALL CITY will drill more wells here and you will own the same percentage in each. Below is a map of the area in Reeves County. Some of these other areas have 6+ wells in them. Your current well is projected to be very good economics to TallCity (at oil prices > $50) so I’d drill more if I was them. So let’s say there is a pretty good chance this cash flow pattern will repeat itself 5+ more times.
I’d say probably not a millionaire. You could probably sell it for $7-800k or something. But closer to that than living at the Linkage Center in the Tenderloin district or whatever. Definitely a good headache to have.
Gosh DCole and NMoilboy Thank you so much for responding !! I don’t know what to say I have been poor all my life. My Mom eventually had some money which the rest of the family stole and I spent what I did have to sue the trustee, anyway long story.
I’m in shock right now Still not sure what to do. I need to talk to an accountant. I will let you know what happens.
My .02 cents. Don’t jump off into a house just yet. Talk to a CPA first. Pay your taxes. They say live within your means or you’ll loose it all. Don’t trust everything or everyone.
Find out where the house are moderatly priced, elect and water too. I know 2 people who came in to a lot of money and with in a few years it was all gone and they had nothing to show for it. They bought new cars, new house and couldn’t pay the taxes or payments. So take it slow and easy.
Thank you Kissy,
When I sell the house I’m in I should be ok. I don’t have other income though and am looking for property with a very low tax base because of that . I mean so low I can pick up cans to pay the property tax. Much cheaper than I had to come up with here. Bummer is you have to buy a real fixer upper. I was thinking if I could sell an interest not all of my minerals I could get a bit better of a place. I’m not young anymore and would like to not have to rough it as much.
I am looking for an accountant to possibly help me through this.
Yes,you will owe income tax on this income and the irs will have a record of it. You need a cpa that’s knows oil and gas .you could have an inherited basis and get extra depletion
Hi Jacqueline,
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