The IRS publications uses language like “has an investment in” to describe royalty owners who can claim the 15% depletion off gross royalties. Although inheritors didn’t purchase their rights, they usually have to “invest” via probates costs, recording fees, etc. to secure their ownership. But nowhere can I find anything definitive as to whether someone who inherited may claim the 15% depletion (not to be confused with cost depletion). I’ve read on bulletin boards of people trying to get a definite answer from the IRS and just being referred to the same publications where the confusion originated in the first place. Does anyone have experience with this?
You are entitled to percentage depletion whether you purchased or inherited the minerals. Keep basis records based on value at date of inheritance, reduced by the depletion each year until the basis is zero.
Hi again Tennis:
Thanks for your reply. I thought I read that for the 15% depletion the basis was not used and that you could could keep depleting as long as the depletion was not more than your income from the royalty. Isn’t it just for the cost depletion method that you need a valuation at time of inheritance and must stop depleting when you have depleted down to 0?
The reduction in basis is from either cost depletion or percentage depletion. Cost depletion is based on an analysis of reserves and decline rates and data which is difficult for a layman to obtain or determine. If you can calculate cost depletion, then you have an option to use greater of cost depletion or percentage depletion. Once cost is zero, then only percentage depletion is available. Most mineral owners just use percentage depletion and deduct it against basis.
Thank you again for help on this topic.