Any deep well activity in this area? Received offer to buy mineral rights. What is market rate for ORRI per NRA in this area?
I am fairly active in this area and to help answer your question I need more info. How many wells are currently producing, proposed, drilling, fracking, recently AFE’d, etc? How are the immediate offsets in area performing and what benches (ie, Wolfcamp A,Bonsespring 3, etc) are they producing from?
This guy’s leading you correctly: royalties are generally really only as good as present and near-term production, when going to sell. Obviously, if you have production coming, probably hang onto those, or sale half.
How many wells? Who’s the operator? Is it across a quarter-quarter or three sections? Not all ‘Rides are the same, even under the same lands: depth severances, back-ins, sometimes an ORRI is carved off but first carries a production payment obligation. The value can range from like $2k-30k per acre depending on the specifics.
Does anyone have any experience in how the federal income taxation works for the sale of an ORRI? I presume that it would be long term capital gains, but how do you determine the original value of the ORRI at the time of acquisition for depreciation purposes? And, is this method acceptable to IRS?
You can 1031 exchange for tax deferment. If you can identify a new investment property (you cannot use it, personally) quickly (you have 45 days to declare it, 6 months to close).
The cost basis, if inherited recently, may have been listed in the estate inventory. Markets change, time passes, short answer is: you declare the value. Dont get greedy.
Talk to a tax specialist whose done this for other people and find out what’s customary. If you get audited, you’ll probably be asked to justify your valuation.
Edit: these are depreciating assets, once a shelf is developed, so it is possible that the value (the capital gains) has decreased, but talking to sellers, declaring a loss will raise eyebrows at the IRS. Frankly, if you sell before production comes online, the capital gains are minimal. After? Demonstrable production at decently high prices —> huge increase.
I’d still advise you to hedge, and only sell half