Cost Basis for Inheritance in Texas

How does one go about determining a cost basis for mineral rights inherited from father back in 2001. Father owned the section of land and 100 percent of mineral rights with only one or two producing wells (very little) at the time of death. At probate we did not know to request valuation of the mineral rights. Shortly after probate we sold the homestead together with 50 percent of the mineral rights. We kept the other 50 percent of mineral rights with our family. Today, we are contemplating selling a portion of these mineral rights. Without a valuation at inheritance back in 2001, I’m afraid we will have to pay capitol grains tax on the full sale price.

Can anyone offer knowledge of how I can go back to date of inheritance and get an accurate valuation for determining cost basis? If it is best to seek an attorney for this, what type of attorney and anyone have recommendations. Ellis County, Texas.

Any assistance is greatly appreciated!

You probably need to speak with either an accountant or an attorney on the proper way to proceed. One option is to get a registered petroleum engineer who does appraisals to appraise those wells with the pricing at the date of death and six months later. Another way is to look at the taxes on the production back at that time as the taxing authorities for the county put a value on it. A rule of thumb back then for producing wells was generally four years of oil royalties and seven years of gas royalties. Best to get professional help so that you have good info for the IRS. Otherwise, you may have to pay capital gains taxes on the complete sale with a cost basis of zero.

Martha, why at time of death THEN 6 MONTHS LATER? What purpose is the 6 months later value? if one uses time of death as the cost basis in inheritance? Is it to determine cost basis for potential later sale? Just wondering.

My understanding is that it is for tax purposes for probate. When we did my mom’s estate, we had both time frames done and then were allowed to pick the lowest amount for estate tax purposes at the federal level. She lived in Texas, so she had no state estate taxes. It also is useful for having a basis value in case of a sale at a later date. Having a basis (usually a step up value) means less capital gains tax if you sell.

Yes, I understand that for probate, you want a lower cost basis, but in the event of a sale, you want a higher cost basis. A cost basis was never figured at time of death, or 6 months later in my case. Now I have a sale of part interest and several more wells since inheritance. So in my case…I need a higher cost basis. Value on these interests have risen significantly, producing or not, to offset capital gains. How do I go about all this since valuation was never established? Probate was in Texas as was inheritance.

There are probably some appraisers in Midland or other high value areas.

Thank you Martha, for all your input and information. I have always had a mental block in foreign language and math. Oil & gas lingo is BOTH, so I have great difficulty wrapping my brain around it. It just doesn’t compute!

Ditto on the first ones! Luckily, I understand the second ones a bit better.

Use the search button above and type in APPRAISER and hopefully, some hits will show up.