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If I purchase a producing royalty income for $1500 that earns $150 per year I get a depletion expense based on the $150 income but can I write off the cost of the $1500?

 
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If I purchase a producing royalty income for $1500 that earns $150 per year I get a depletion expense based on the $150 income but can I write off the cost of the $1500?

You cannot take a percentage depletion and cost depletion (of the $1,500) on the same property.  Most small investors use the percentage depletion. 

There are two ways of calculating depletion allowance: cost depletion and percentage depletion. Oil and gas royalty owners have the availability of using either, yet for mineral properties, you must generally use the method that gives you the larger deduction.

Under percentage depletion, the deduction for the recovery of one's capital investment is a fixed percentage of the gross income (sales revenue) from the sale of the oil or gas. For oil and gas royalty owners, percentage depletion is calculated using a rate of 15% of the gross income based on your average daily production ...

Cost Depletion

With cost depletion, a taxpayer recovers the actual capital investment throughout the period of income production. Each year, the taxpayer deducts a portion of the original capital investment, less previous deductions, that is equal to the fraction of the estimated remaining recoverable reserves that have been produced and sold that year. The cumulative amount recovered under this method can never exceed the taxpayer’s original capital investment.

Source:  http://www.mineralweb.com/owners-guide/leased-and-producing/royalty-taxes/depletion-allowance/

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Highlighted
Level 15

If I purchase a producing royalty income for $1500 that earns $150 per year I get a depletion expense based on the $150 income but can I write off the cost of the $1500?

You cannot take a percentage depletion and cost depletion (of the $1,500) on the same property.  Most small investors use the percentage depletion. 

There are two ways of calculating depletion allowance: cost depletion and percentage depletion. Oil and gas royalty owners have the availability of using either, yet for mineral properties, you must generally use the method that gives you the larger deduction.

Under percentage depletion, the deduction for the recovery of one's capital investment is a fixed percentage of the gross income (sales revenue) from the sale of the oil or gas. For oil and gas royalty owners, percentage depletion is calculated using a rate of 15% of the gross income based on your average daily production ...

Cost Depletion

With cost depletion, a taxpayer recovers the actual capital investment throughout the period of income production. Each year, the taxpayer deducts a portion of the original capital investment, less previous deductions, that is equal to the fraction of the estimated remaining recoverable reserves that have been produced and sold that year. The cumulative amount recovered under this method can never exceed the taxpayer’s original capital investment.

Source:  http://www.mineralweb.com/owners-guide/leased-and-producing/royalty-taxes/depletion-allowance/

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