We inherited mineral rights in 2019 that are in the state of Oklahoma. Can someone please explain how to prove the current value of the mineral rights so that the IRS will not list it at $0.00 and we are not taxed on the whole sale. I read that topic a few months back and still don’t understand it. We are still undecided on whether to inherit the mineral rights in equal shares among the hiers then sell or to keep them in the estate and sell during probate. Just not sure what that means that I read several months ago with the mineral value being listed at $0.00. Does that mean the value of the wells when they were first opened and producing? Or does that mean we have to establish a value at the time of our Mother’s death?
Your new basis (value) is set at the date of your Mother’s death. You can speak to an accountant to get the value. The IRS has certain rules to follow based on existing production.
Thank for that information. Does that mean that when the mineral appraisal for the mineral rights value is done it must be done on the calandar date of our Mothers death? Would that appraisal then be the one to use when selling the minerals?
Not sure from your post whether the mineral interest your mother owned was in a producing unit at the time of her death, was just under lease but didn’t have wells completed and producing, or was just an open, unleased mineral interest.
Also, when you say “…so the IRS will not list it a $0.00 and we aren’t taxed on the whole sale”, are you talking about the capital gains tax that would be due if a future sale of that mineral interest was made?
You will need to establish the value of that mineral interest in conjunction with the probate of her estate and that value becomes your basis for future capital gains taxes. You ask to “…explain how to prove the value”; From my non CPA viewpoint, if there was production at the time of her death you can establish that value by having an appraisal of the mineral value made by a reservoir engineer or mineral appraiser. If the mineral interest wasn’t producing but was under lease you could place a value on it based on some multiple of the lease bonus that was paid but that is more subjective. Any value placed on that interest, whether it was a producing property or just leased mineral interest, would be subject to challenge by the IRS through an audit so you, or professionals you hire, will need to document as fully as possible how that value was established.
If the mineral interest is not producing and isn’t under lease then it’s value is really questionable and might depend on the level of lease activity in the area, or in fact may have had little value that can be documented at the date of her death.
I’m in a similar situation so I would like to know what someone with experience or a professional would say. Our parents estate was probated in Oklahoma several years ago which is when we got title to the mineral rights. There is existing production and has been for many decades but the production is low. We just sold our mineral rights last month at a very low price (as everyone knows the market has gone down the drain during last year). We had a number of offers to see last year at more than 10 times what we finally sold at some months later. Now we’ll have to deal with capital gains but I don’t know how to value the minerals at the time of probate. They were certainly worth much more at that time than what we had to sell them for so if anyone can give some serious advice we’d appreciate it.
The value of the minerals for IRS purposes is as of the death of the person you inherited from. You will need an appraisal from a certified petroleum engineer or appraiser who can back up their values to the IRS. Before you contact anyone, you will need exact descriptions of the mineral acres you sold, the date of death of the person you inherited them from. It is somewhat more difficult to appraise after several years have gone by versus getting an appraisal done during probate when information is more easily available and timely.
Good Morning John. You might give Terrel Shields(Certified General Appraiser-Arkansas and Oklahoma) a call. He could possibly answer some of your questions. He is a member of this Forum.
Thanks for this information. To clarify, are you saying that AFTER the minerals sell we need to hire an appraisal from a certified petroleum engineer to back up the values to the IRS? Should this be done PRIOR to selling or AFTER selling? Also, if we inherit the minerals after probate, we were told a land man would trace the ownership and acerage back to the beginning and determine the shares, split 9 ways for the heirs. There was a question posed to the estate atty which was Will the acerage and the location of the minerals owned by our mother be listed on the mineral deeds? The response was the description/location would NOT be listed on the mineral deeds. That sounded strange to me, is that accurate? It seems to me that those 2 items should be on the deed, otherwise how do you know what you own if we go that route??
Thank you Dusty1 for your response. Your input has given me more to consider that we didn’t think about. Appreciate that.
To clarify, ideally, an appraisal is done at probate with an effective date as of the date of death. The prices for oil, gas and NGLS from the known producing wells, permitted wells and current leases are taken into account-so some possible uplift may be considered for the pending wells. If you do an appraisal much later, the sales from nearby minerals are generally used instead, often resulting in a lower value “as of date of death” because not as much data is available. Two appraisers have explained it to me this way. I would suggest talking to one to confirm.
As to the mineral deed, that sounds odd. Every deed I have has the exact description on it. What you may mean is that the probate listing of the minerals and their description is used instead of issuing new mineral deeds. The probate documents are the title documents. Again, they should have the descriptions as exactly as they can be traced. You have to know what you own. Perhaps one of the attorneys can elaborate as to the official answer.
Thanks Martha for that answer. An appraisal was done by the same atty who is the estate atty. too and the same estate atty has offered to broker the sell. I don’t know if they are certified petroleum engineers or not, I just know the estate paid for the appraisal. I will have to ask. We are still in probate with Mother’s estate. I thought that determining the “value” of the minerals was another document that needed done to satisfy the IRS. So if I am understanding this properly, the appraisal does actualy identify the “value” for IRS purposes. Right" I will have to ask if the estate atty has supporting evidence and documentation in this appraisal. With regard to the question on the deeds, if we move forward with splitting up the minerals 9 ways and re-deeding them that is what was answered and I thought that odd too. I will have to get clarification on that. Thanks so much for your response. Your so very helpful and it is much appreciate.
Looks like you have the appraisal done as of the date of death, so step one is done. He/she does not have to be an engineer. They may have hired one or they may know quite a bit and have the backup documents. (We have been through several probates and minerals can flag an audit.) Some attorneys say that you do not need new deeds as the probate documents suffice. Others like to do new deeds. It may depend upon their expertise and laws of the state. The probate documents may say something like 1/9th interest in the xxx deed recorded in book yyy page zzz. That gives the title path. Just ask questions for clarification.
You really need to know about the one horizontal well that we discussed and the potential new one. If you send me your list, I can give you a feel for activity near you acreage. That helps in making a determination whether or not to sell.
Dean Eshelman, CPA - Estate valuations has two methods. Date of Death and Alternative Valuation. There are time frames and elections to be made to select the Allternative Valuation as a protective measure.
In general the Estate is valued at which ever is most favorable to you. – See Your CPA and IRA Form 706 Instructions, p 14 as well as Publication 559-- Here is the quote "If alternate valuation is elected, value the property included in the gross estate as of the following dates, as applicable. • Any property distributed, sold, exchanged, or otherwise disposed of or separated or passed from the gross estate by any method within 6 months after the decedent’s death is valued on the date of distribution, sale, exchange, or other disposition. Value this property on the date it ceases to be a part of the gross estate; for example, on the date the title passes as the result of its sale, exchange, or other disposition.
• Any property not distributed, sold, exchanged, or otherwise disposed of within the 6-month period is valued as of 6 months after the date of the decedent’s death.
• Any property, interest, or estate that is affected by mere lapse of time is valued as of the date of the decedent’s death or on the date of its distribution, sale, exchange, or other disposition, whichever occurs first. However, you may change the date of death value to account for any change in value that is not due to a “mere lapse of time” on the date of its distribution, sale, exchange, or other disposition."
Non-producing minerals will have no value. How can they tax you on them? They can’t.
The selling of minerals triggers a taxable transaction, producing or not.
You don’t have to sell all your minerals at one time. For instance, if you own 10 net mineral acres and been offered $10,000/ac to sell, you’ll be taxed on $100,000. If you only sell five acs, you’re transaction will be $50,000 plus you’ll still own five acs. Then you can sell the other five acs in another tax year and not take such a big hit. Yes, the price offered may go down, but I’ve had mineral owners who have received higher offers after selling. The thing to keep in mind is that it doesn’t cost you anything to own minerals in OK since there aren’t annual property taxes to pay like in neighboring states. If a buyer insists on all or nothing, there’s a good chance they are going to flip all or some your minerals to someone else for more than what they’re paying you.
All minerals have value both producing and non-producing. Non-producing are usually valued at some multiple of average county per net acre lease bonus. True the value might only be $1.00 per acre. A second value option would be the assessed value if the state taxes minerals.
Well here’s another angle. If mother was in a ‘hot’ area when she died and the value is much higher than the proceeds of a sale i.e. value has fallen, is that then a Capitol Loss that can be written off over a period of time?? Just curious…
I’m not a tax person so I don’t know the answer, but interested to find out. It seems it should work that way…
If you don’t get an answer on here soon I’ll poke my tax people I know for an answer.
Google says yes, but talk to a full blown CPA, not a tax prep company.