Basis of Mineral Rights


#1

I am trying to figure out the cost basis of mineral rights inherited in 1968 and 2012 in Garvin county. I have been told (1) zero if inherited, (2) Value reported on Estate tax return & (3) Based on income generated from royalties.

Rights have been sold and I just want to report the correct cost basis for determining Capital Gain or Loss.

Thank you,

John


#2

Amount listed on Estate tax return should have been determined from an equation using the monthly income at the time. That should be your basis.


#3

What if there was no amount listed on the return?


#4

The general rule of thumb for vertical wells is four years of oil royalties and seven years of gas royalties. Nor horizontals back in 1968, but the 2012 ones might have some and that may be a different story.

If you have no documentation, then your value may be set at $0 by the IRS and you pay capital gains on all of it.


#5

Thank you Kathy


#6

Thank you M Barnes


#7

Zero.


#8

It would not be zero, because you sold it, therefore it has value. Almost everything has some value. Inherited assets get a stepped basis to their fair market value at the time of death. Any reasonable valuation will usually be accepted as long as it can be explained. Depending on the amount of taxes you are going to pay on this sale would dictate how much effort you wish to put into calculating a basis. The 36 - to 48 month basis is a valid method and easy if you have access to 1099's or the decedent's schedule E. You can use the Estate Tax Return but the goal on the Estate Return is to get the lowest reasonable valuation for the estate. Your goal is the exact opposite.

If none of these easier calculations are available to you, you could make a case for taking your sale amount and reducing it by the annual inflation rate by year for the last 6 years. The key is whether it is a reasonable method of valuation. If it's a significant amount of taxes, talk to an accountant or attorney that specializes in estate planning.


#9

Laura- The question is ‘cost basis’, not value. John inherited the minerals so his ‘cost’ was zero.


#10

If you inherit, you are not necessarily at zero. If you have an estate valuation by an engineer or have the data to prove what Laura C just said, you can get the step up in value. An attorney or accountant can also help with the evaluation.


#11

Inherited property gets a stepped-up basis or cost basis for tax purposes. The trick is calculating what the basis is. I have used the 36 - 48 month rule, I have also hired an Engineer to provide a reserve estimate with appropriate pricing and a PV12 amount which was used in the tax return.

You could also call the IRS, in my experience dealing with the IRS and preparing Estate Tax Returns, they have been very helpful and reasonable.


#12

Thank you Laura C, I agree with your explanation and will see what I can figure out. Much appreciate


#13

Good afternoon Laura, I have a value of 220,625 over 48 months How would I apply this figure if trying to reach a basis? Thank you for your time.

My email is jcarlin2@mac.com


#14

If you inherit an asset, then your basis is the value of that asset on the date of death of the decedent. No matter what the decedent’s basis was.

If you are gifted property, then your basis is the same as your donor.

While it may be difficult to determine the 1988 value, I would seek the assistance of a landman to provide an appraisal.


#15

Sorry to disagree. But you will be entitled to Stepped-Up Basis. See: IRS Page It states: To determine if the sale of inherited property is taxable, you must first determine your basis in the property. The basis of property inherited from a decedent is generally one of the following:

See also: 26 U.S. Code § 1014 - Basis of property acquired from a decedent

No need to pay full capital gains if there is a basis.
This is why it is better to inherit, rather than be gifted, appreciated assets.


#16

Thank you Richard, I agree with you concerning FMV on date of death. But I am just trying to figure out what the basis would be on the 36-48 month rule with the 1099’s total = $220,625. Problem is no values were listed on Estate tax return. But I do have the 1099 documentation.
John


#17

John: Mark Oates could probably give you a valuation. 405.365.7515 he is a landman and has done similar work for my clients.


#18

Thank you for your time Richard, I appreciate your help. I finally figured out what I needed I believe. You have a nice day. Happy New Year!


#19

IF Estate taxes were underestimated on return 4 years ago is there any way to amend the value this year or are we stuck with value we thought it was? It was inherited.


#20

That would be a CPA question.