Last year I purchased mineral rights from my mother. I was curious if there is a depreciation, or some method to claim this on my taxes. Do I just pay income tax on the income that has come in or is my initial payment some how deductible? Any point in the right direction would be really appreciated.
Your initial purchase price is not deductible but does establish your Cost Basis in the Minerals. You can take a 15% Depletion (not depreciation) expense on your taxes against Gross Royalty income each year. Your CPA will figure your taxable royalty income correctly.
Thank you very much I think this will point me in the right direction.
To make sure I understand, I can take 15% of what I paid, off of the Gross Income?
Unfortunatly while I know a CPA would be a smarter method I just cant afford it right now, would you imagine turbo tax will have the schedule e or what ever it is needed for this?
Your percentage depletion is a tax deduction calculated by multiplying your gross royalty income by 15%. You have to input this depletion amount on your schedule E…Turbo Tax will not calculate this deduction.
Thank you so much for the reply and I’m sorry for all the stupid questions, but when you say gross income, does that mean minus what I paid this year? I paid my mother 17K for (apparently overpaid by 1K according to a financial planner we used later) and we have had lets say 4K in income this year. would my taxable gross income be zero?
Again thank you, taking over my moms finances has been quite enough of a struggle but adding all of this oil stuff has added a level of stress. Its not just one property, its multiple very small ones, in different counties so property tax in 10 counties etc. Now the big test, getting through income tax the first time and somewhat learning the ropes.
You would be best served if we could have a telephone conversation in order for me to get all the facts and properly explain the differences between gross income, taxable income and how percentage depletion plays a part. Please forward your telephone number.
Gross income has zero to do with your purchase price. On each check stub, you will have a gross sales revenues and a deduction for severance tax and maybe deduction(s) for gathering, processing, transportation and/or marketing charges. You receive a check for the net revenues / net royalties = Gross Royalties less Severance Tax less Other Charges (if any). It is similar to owning a rental house. The tenant pays rent = Gross Income. You can deduct payments such as lawn care, electricity, water, etc. The amount left is your net income for the month. On oil and gas, you get to add a deduction of 15% of the Gross Sales as depletion. You may not deduct your purchase price paid to your mother. So if your Gross Royalties were $4,500 and severance taxes and other charges were $500, then your Net Royalties is $4,000. Your depletion is 15% X $4,500 = $675. Let’s suppose your property taxes were $500. Therefore, your taxable income is $4,000 net royalties less $500 property taxes less $675 = $2,875. You will pay income taxes on the $2,875. All is reported on Schedule E of your tax return. You may not deduct your purchase price from the income. Your basis in the property is the $17,000 purchase price less the $675 of depletion = $16,375. If you sell for $20,000, then your profit is $3,675 - the difference between the sales price and your basis. So each year, your basis will be reduced by depletion, but not below zero.