Mineral valuation at time of inheritance

#1

I inherited minerals about September of 2016. I sold them about October 2018. Now I am doing taxes and need to know the minerals values at time of inheritance. I sold about 16ma at 8000 per ma, and now need to know what I could have sold them for September 2016.All I know is it was the Newfield Co. and S19-T17North-Range9West. Thank you for your help.

#2

If you inherited, did you get it through a probate or by intestate affidavit of heirship? If an estate was involved, the executor should have had a value established and reported to you. If not, then a bit more difficult. You can look up sales in that township and range in Kingfisher county on www.okcountyrecords.com You can figure out the price by the stamps on the file. "If from relative to relative, no money changes hands, then document stamps are not required. If not, doc stamps are about $1.50/$1000.00 of value. " What royalty were your acres? That makes a difference as well. Royalties at 1/8th are lower value than at 1/4th. If you cannot prove a value, the IRS will assume zero and you may be charged capital gains on the whole sale amount.

If you had royalty check stubs from the Rosia 1H-18X well, that would help. Also any royalties from old vertical wells. A professional engineer can backtrack and tell you a general fair market value based upon the wells back in 2016. More of a discount factor if the acreage was in a trust or an LLC.

#3

I’m considering selling my minerals. It’s my understanding that I can do a 1031 exchange of minerals for other real property in order to avoid any capital gains. Has anyone had experience doing this?

Thank you,

Paula Kothmann Frio County

#4

I’ve used :http://www.petroleumstrategies.com/ in the past and had great success. It’s truly a great way to defer gains/recapture.

#5

Paula — As you consider this, keep in mind:

  • Currently a mineral interest sale in Oklahoma held for at least five years is Oklahoma tax free under the 561 Capital Gain Deduction — that’s usually about a 5% savings and that deduction has been on the chopping block recently so it may dis-appear
  • Inherited mineral interests may have a tax basis which reduces your taxable income to report
  • Capital gain rates are some of the lowest we’ve seen in quite a few years
  • Nature of the exchange property received and possible future taxation of that property if rates or law changes

Years ago, I had a client who continued negotiations on the sale of his company over a year-end to the point that he finally got another $500,000 for it but a change in tax law took $380,000 of it…

1031’s are great when appropriate and I’m considering one myself at this point but not on minerals — just need to think outside the box a bit on possible other factors that could influence that decision.

#6

1031 Exchanges have very tight timelines. You will need to be very careful and have all of your ducks in a row.

#7

thank you, Martha.

I’ve done a 1031-exchange before, selling surface rights to my ranch in exchange for houses. I obtained my realtor’s license to make it easier. Buying investment property in Austin, Texas, albeit expensive, is pretty safe since we are adding so many jobs to our economy. I always get really high-caliber tenant applications.

Because I had inherited some of my ranch in Frio County from my father in 1981 and some from my mother in 2013, and all the surface was undivided, the capital gains calculation was a nightmare, so I ended up exchanging every dime of my proceeds. Likewise, I inherited a portion of my minerals from my father and a portion from my mother, so I want to avoid the time and expense of calculating the gains.

The tax code seems to be cracking down on what is allowed for like-kind exchanges, but it’s my understanding that the IRS still considers mineral rights as “real property” that can be exchanged for other real property. I am not a tax attorney and I have not yet broached this topic with my tax attorney.

I have been offered a new lease on a portion of my mineral interests, and I’m not sure how that would affect my ability to sell my minerals, thus I must explore the consequences now. Any insight from others who have sold would be most appreciated.

many thanks,

Paula Kothmann

#8

Thank you, OkcNhra.

I know, I know, like the rest of you I was always told “never sell your minerals” and I likely won’t but at least I want to know my options.

Capital gains are low rates to a certain point, but if if the gain is high it bumps to higher rates, per my understanding. But the expense comes from the valuation at the time of inheritance. You must document to the IRS where you get your figures. I am certain that my minerals are worth more today than in 1981, when I inherited about half of them.

Yes, the tax on gains is only deferred, but it’s my understanding that if you die, your heir(s) get the property at a stepped-up basis. That of course can change but we can only work under the laws that we have in place.

I might also consider an installment sale. Have you had experience with those? Who gets the royalty if there is production in place (I realize that all of this is negotiable but I’m trying to get an idea of what others’ experiences)?

The only reason that I am considering selling is that my current operator wants me to consent to an assignment to a company that pretty much told me that they have no intention of meeting their continuous drilling obligation of a new well every 180 days. If they don’t drill a new well by April I may be forced into a working interest position. That’s new territory for me.

Allocation Wells Water Down My Royalties

The assignee is also trying to get me to legalize allocation wells for wells already drilled (yes, backdate the amendment, which I oppose in principal; they agreed to lease terms and they should honor them; what happens after an amendment is a new agreement!) and I may prefer to wait to see what happens in the courts.

I have no problem with lease amendments, but what you receive should be equal to what you give up, and they should take affect when the amendment is signed. We had to operate at the old terms, so the operator should as well.

Allocation wells put mineral owners in the same position as our great-grandparents: instead of the new “customary one fourth” we are getting more like “one sixteenth” if we have to share with 3 neighbors. That would not be an issue if they drilled four wells to satisfy obligations for four leases.

Even allowing for the drop in the price of oil, these allocation wells really water down our payments, but the real issue for me is that they insist that they can hold all our acreage and that of 3 neighbors by drilling only one well (and they didn’t even attempt to get a pooling agreement). I may be better off taking my capital and investing it myself if the operator insists that one well can fulfill its obligation to drill every 180 days for more than one lease, and in some cases several leases (our tract is 6,000 acres, so they really can’t argue that they need to go to our neighbors, and our pooling clause states that we always get paid 25% on at least 51% of each well, so of course they didn’t want a pooling agreement).

I hope that we get some resolution on allocation wells that is fair for all. We have a lot of good minds working on the issue. That outcome will sway my decision to hold or sell.

Thanks again for your input,

Paula Kothmann

#9

Hi, is it possible to contact you directly?

I have inherited mineral interests in Texas. In order to settle my grandfathers estate, we need to know the value at death. One of our trustees is fighting the method that my grandfather wanted the minerals to be valued. Which is the rule of thumb of X months income times 3-5 years. (This would be 200k or less) Since the disagreement, the same trustee had a valuation done resulting in a valuation of 1.2 million. To combat that valuation I had a a valuation done as well, resulting in a valuation of 200k. We seem to be at a stalemate now. We have since hired a lawyer thinking this will need to go to court. I’m hoping you can help guide me on a few things.

#10

I would not be qualified to give that type of help. A lawyer can help you better. You may need tax guidance as well. For the heirs’ benefit, a higher valuation is better than a lower one since the step up value is greater. We just went through probate for one of our relatives and the engineer valued at date of death and six months later. If oil and gas prices went up significantly, then that could explain part of the increase. For estate purposes, the estate would like a lower valuation so it would pay less taxes. Get professional help.