My family has recently sold all of our Mineral Interest in Ward County Texas. We inherited our minerals from our grandmother when she passed in 1996. Now we will need to determine the basis for determining and paying the Capital Gains tax. If someone here on the Forum has recently been through this and could offer some help or steer us in the right direction to get help, it would be greatly appreciated. Thanks!
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The tax basis is the estate value in 1996 less 100% of depletion claimed from 1996 to date of sale, down to but not below zero. In 1996, mineral values were very low as oil prices were down and there was virtually no leasing in that area. If the properties have producing wells and you have been taking depletion, it is most likely the basis is zero.
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Ugh! Just went through this. It is SO hard to calculate capital gains taxes on mineral interest sales. We went around and around and ultimately decided to set it at -0-. Otherwise you open yourself up for a likely audit. Our amount was high and would have even more chance of an audit. Kicker was we live in CA and had to also pay ordinary income tax on the gain - ouch! You can hire someone to help establish a base but they are in high demand and very expensive. Sometimes it’s easier just to bite the bullet . . .
Your CPA could probably help you. Your basis can be adjusted to the value of the minerals at the time you inherited it. Called a “Stepped Up Basis”. Using that will likely get your basis off the “zero” basis level resulting in less tax. If it was just a small mineral inheritance of only a few acres, I probably wouldn’t mess with it. If larger, maybe so.
Yes you start with stepped up basis and then reduce it by all depletion claimed since your date of acquisition.
TD is spot on. And for future reference you’re pretty much locked into the value on the Probate Inventory (absent a 706 or 709). The exemption back then was only $600K ($1.2M if second to die and the former will was drafted correctly). That said there was a consensus back then to go low on values. And like TD says value then would be hard to justify in the first place. Probate probably didn’t even list that asset ($0).
But remember, in today’s world of $15MM exemptions, to estimate values on the most aggressive high as is possible on probates, 709’s and 706’s. On minerals and all assets. You have to have a basis for your estimate but inherent in all estimates there is a high side.
Statute of Limitations is 3 years on 706/709…