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Tax 6878 Investing in Royalty Trusts Summary

Autor:   •  February 22, 2018  •  766 Words (4 Pages)  •  155 Views

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deductions allow recognition of the decreasing availability of the natural resource. As the deductions are taken the basis is decreased. There are two types of depletion methods: cost and percentage. Cost depletion recovers the adjusted basis of a natural resource by dividing basis by the estimate of recoverable units. Once the full cost has been recovered no further depletion is allowed. Percentage depletion is calculated from a percentage of gross income from the natural resource. This percentage varies depending on the natural resource being recovered and often results in deductions above the resource’s basis.

Certain fuels allow for a credit to flow through to unit holders. The credit is designed to encourage development in certain areas by lowering production costs. This credit is allowed in the year a unit holder receives the related income distribution, not the year it is sold.

Gains and losses are recognized when a unit is sold. The gain or loss recognized is calculated by finding the difference in the amount realized and the original basis. Any gain flows through to the unit holder at long-term capital gains rates. Any difference between the original basis and the adjusted basis is recaptured as ordinary income.

Placement of Trust Units

Depending on the desired outcome a royalty trust can be put into a taxable or retirement account. If the income from a royalty trust is intended to meet a short-term goal, then units should be held in a taxable account. If long-term goals are desired then the units can be put in a retirement account to shelter the flow of current income.


After review and summary of the article “Tax and Investment Planning with Royalty Trusts,” the conclusion is that investing in a royalty trust could be advantageous. Benefits to owning an interest in a royalty trust are most apparent when investing on a long-term basis. Although, price fluctuations generally do not affect the overall high yield on this type of trust, an investor must be prepared for extreme price fluctuations. Tax advantages allow an investor to save as rates are billed at either capital gains rates or ordinary personal income rates and not corporate tax rates. My recommendation is to invest in royalty trusts for high yield and tax saving opportunities.


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