I inherited some oil/gas royalties when my Grandma died (as did my siblings and my mother and aunt) and began receiving a royalty check after all the proper papers were filed, copy of death certificate was mailed in, etc…I received royalties for three years before I decided to sell two (of the 15 that I own) wells last year. I intend to keep the others and will continue to report their royalties on my Sch E on my annual 1040 tax return.
An appraisal was conducted and it states for the first well that the value/acre was $900 for that one well which had been in production for the previous five years. The oil lands contain 320.00 acres more or less at the location of that well. I sold the share for $8225 because of well, y’know, life hit me hard and fast and I had to pay for some unexpected expenses.
The second well was appraised at $5000 value/acre with five wells on the site of the same oil lands containing 320 acres more or less with an addedum that states Total Net Mineral Acres 0.900017 at the bottom of the Lands section of the paperwork. I sold this second share for $7225.
The question I have is quite simple. When I fill out IRS Tax Form 8949, under the sales price/proceeds column, I know I’ll put exactly how much I was given in payment for the two wells but I’m not certain about the Cost Basis portion of the document. Do I just list the $900 for the first one and list $5000 for the second one as stated on the appraisal sheet? Or does the Total Net Mineral Acre number come into play when making my calculations?
To determine your basis, there are several factors. First is the basis of the minerals when inherited from your grandmother. The total basis is allocated to your minerals based on your proportionate share of the inheritance. If the total value of one tract is $900 and you received 1/9 of the minerals, then your basis is $100. If the $900 valuation was per net mineral acre, then you have to know how many net mineral acres your grandmother owned to calculate the total value at her death and then determine the basis of your share of the inheritance. Secondly, your basis is reduced by any depletion that you have deducted against royalty income over the years. So if your basis is $100 and you deducted $10 depletion in one year and $5 depletion in second year and $5 depletion in third year, then your basis will have been reduced to $80. The basis is reduction continues until the basis gets to $0. It is your responsibility to keep track of the depletion and reduction in basis over the years. I strongly suggest that you consult your tax accountant to help you determine your net basis in each tract sold.
But how do I go about in determining how many net mineral acres that my Grandmother owned? I’m not sure I even understand what that is meant to convey? What’s the difference between net mineral acre and regular land acreage? I know the entire parcel of land acreage is 320 acres but I cannot find but one small reference to net mineral acre as I wrote above.