Drew is a new owner of minerals and royalties in Karnes County and told me he has heard conflicting stories about whether an appraisal is necessary and wanted to set the record straight on what he should do.
I explained to him that first, there are two types of appraisals – Current and Retrospective.
Current appraisals give you the present value for your interests as they stand today.
If you are curious about this number and serious about selling all, or some of your interests, the best way to find out how much your assets are worth is to take them out to market to see what buyers are willing to pay for them. This is the simplest way; no need to pay for a current appraisal to be done as the market opinion is going to give us all that we need to know.
The only reason Drew would need to pay for a current appraisal is if he wanted to put his assets into a trust because a monetary value will need to be given to complete this setup.
Retrospective appraisals are a must for interests that have been inherited and the new owner intends to sell some, or all, the interests in the future.
For any mineral and royalty owner, if their assets are producing (meaning they are receiving monthly royalty checks), the revenue received is going to be taxed as ordinary income, which could be anywhere between 15-37% depending on your tax bracket. A Retrospective appraisal will give you a dollar value telling you how much your interest was worth at the time you inherited them. This is also called your “basis”.
Why is this value important to have? If Drew inherited his interests and decides to sell them in the future and they are worth more than they are now, if he did not get a value for them at the time of inheritance then he will be taxed on the full sale price.
You don’t want this, there is a better way!
Take this example: Drew inherited his minerals and royalties and did the right thing by getting a Retrospective appraisal. We determined that the total value at the time of inheritance, or his “basis”, was $500,000. 18 months later, he decides to sell his interests for $1 million. Since he owned his interests for longer than one year, he is going to be taxed at the long-term capital gains rate, 15-20%, but the amount by which he will be taxed on can make a huge difference:
With a 15% capital gains tax, if he did not get a Retrospective appraisal, he would be taxed on the full sale amount = $1,000,000:
$1,000,000 x 15% = $150,000
But since he did get a Retrospective appraisal done, he is only going to be taxed on the $500,000 profit:
$500,000 x 15% = $75,000
That’s half the amount he would have had to pay if he did not get a Retrospective appraisal!
As you can see, there can be significant tax savings by having a Retrospective appraisal done if you’ve inherited your minerals and plan to sell in the future. Venergy Momentum provides Retrospective appraisals from our Licensed Petroleum Engineer. You can learn more about them here and visit our Frequently Asked Questions page for more information.