Cost Basis on Inherited Mineral Rights - Pecos County

I just sold my mineral rights that I inherited in 1985. I need to find the cost basis in order to determine taxes owed. I have no idea where to start. Can anyone help me? Thank you so much.

Pat

It is likely that your tax basis is very low. Best source is the probate records, estate tax return and mineral appraisal in 1985 which would list value. If the minerals were producing, then the value would have been based on the production. If the minerals were not producing in 1985, then the value will have been low - maybe $5-10 per NMA. If your minerals have been producing between 1985 and 2020, you have to reduce your original cost basis by 100% of depletion taken over the years. The reduction is applied until the basis is $0.

Hi Pat,

You’ll need an appraisal of the minerals as of 1985, often called a “retrospective” appraisal. The mineral appraiser (usually an engineer or geologist with appraisal experience or certification; that’s what the IRS likes to see best) will determine what the market value of the minerals were on the date of aqcuisition. Here is a post that has more information: Question About Capital Gains Tax and the Value of Inherited Mineral Rights

There are some resources listed on the directory of this site as a starting point, but any appraiser should know exactly what you need. It is a fairly in depth report though (to satisfy the IRS) so expect to pay at least $2000 and up to $10,000 depending on the size and complexity of your minerals. If you have more than a few nma in Pecos county, it’s probably well worth it to you based on how much activity and value is there.

pecos county wells as of 1985

-Tracy

This is a great suggestion. An additional caveat is that you still have to reduce that retro-appraisal value by 100% of the depletion that you have deducted on your tax returns since 1985. If there have been some good royalty income, then your current basis may be negligible.

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Hey Pat,

I’m a mineral buyer and I can tell you that there is no real way to determine a cost basis on the sale of your minerals and the capital gains you will pay. I’ll provide this information that should be a good example for Pecos County and the Delaware Basin in general, since Reeves and Pecos are right next to each other and Reeves acreage is far more valuable than Pecos…We have a fairly long history in Reeves County and the Delaware Basin, so we can speak to the history and prices paid. There were no wells in Reeves County 15 years ago as the county was nothing more than a leasing prospect. We actually did the title work on one of the first modern day wells drilled in Reeves County back in 2006. At that time, oil was around $65/barrel and I bet a mineral owner could not have sold an acre for over $100.00 per royalty acre (or $200.00 per mineral acre based on a 25% royalty). Fast forward 15 years and prices have plateau’d around $15k per royalty acre (or possibly less due to the oil crash in March) where they have been for the past several years. The area is very explored at this point and models can be drawn accurately depicting total gas/oil produced from each well. For this reason, the price of oil is basically the only factor that would (marginally) sway the price one way or another, but would not have a dramatic effect either way… In other words, you would essentially have to go off of what someone may have paid for those minerals in 1985 which would have been next to nothing. Your best bet to avoid paying any capital gains taxes at all would be to 1031 exchange that money into some sort of property. Otherwise, you’re capital gains is going to be whatever you sold the minerals for minus what they would have been worth in 1985, which would be close to zero essentially.

I disagree. A 1985 value would have zero to do with unconventional modern production. You can’t look at this under the modern lens. In the conventional 1985 world, Pecos county has DRAMATICALLY more value than Reeves due to the location of the Central Basin Platform. Take the Yates Field, for example. The CBP is full of highly productive and old carbonate waterfloods and CO2 floods that have been producing for almost 100 years.

It really matters where Pat’s minerals are in Pecos county to answer the question of value.