Understanding Royalty Taxes – Part 6 County Ad Valorem!
June 28, 2019
It is comparable to the oil and gas severance tax applied to royalties except it is levied against the real mineral property only and collected by the county, not the state, in which a well is producing.
How Does The County Ad Valorem Tax Work?
The county ad valorem tax that is applicable to anyone who owns mineral interests in somewhat like the real estate tax that must be paid every year on a house, building, or parcel of land.
Because mineral interests are considered real property, anyone with ownership of a producing interest must pay a yearly county tax on these earnings, although royalties earned from the interest are not affected by this tax.
How is the Ad Valorem Tax Calculated?
The county ad valorem tax that mineral interest owners must pay each year is levied based on the fair market value of the producing mineral interest.
In this case, fair market value is the price that a seller would accept and a buyer would pay to purchase that real property interest on any given day.
Since it is based on market value which fluctuates frequently, the ad valorem tax is not relative to income earned when you sell your royalties.
This means the amount you pay may be different every year depending on how the value of your mineral interest changes.
How is the Fair Market Value Determined?
The market value of the mineral interest from a producing well is calculated using a formula based on the estimated recoverable share of the well and how much it is expected to produce is then discounted to reflect the present worth of that product.
Other factors used to determine present worth of the estimated product from a well include operating expenses, the current price of oil and gas, and discount rate.
Those selling royalties end up responsible for a prorata amount of the determined figure according to the degree of ownership of the interest.
Making Sense of the Ad Valorem Tax
The county ad valorem tax can be complicated as it applies to the actual ownership of a mineral interest as well as the assessment and value of the interest, not the income earned selling royalties generated by that interest.
Additionally, it only applies when a mineral interest is actually producing, such as when you are selling your royalties.
Still, you may not agree on the assessed value assigned to your interest, so it is critical to keep good records and understand how this tax is calculated.
Owners in disagreement with the assessment of their property always have the option to team up with an experienced royalties professional who can help them determine the true fair market value of their interest and what the ad valorem tax should be.
If this article has been helpful and you missed any or all of the previous articles in this series, be sure to read the other articles in this 6 Part series: Part 1 Oil Severance, Part 2 Depletion Allowance, Part 3 1031 Exchange, or Part 4 Gas Severance, and Part 5 Income!
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