Retrospective Mineral Appraisal (Capital Gains)

I am looking at selling the mineral rights that I inherited several years ago. I know that I will have to pay long-term capital gains if I do this (in my case it would be 15% of what I get from the sale). I know that I need to get a retrospective mineral appraisal that establishes the tax-basis for the capital gains tax. Basically it establishes what my mineral rights were worth on the date I inherited them. I am curious, has anyone else gotten this type of report? Do you want to get this type of work done BEFORE you sell your mineral rights?

There are a few twists and turns going down this road. First, was a federal estate tax return filed for the decedent from whom you inherited the property? If so, your basis is the value set forth for such interests on such return. If no federal estate tax return was filed was a probate inventory filed listing those interests? If these were Texas mineral interests, the executor or administrator would have been required to value the mineral interests at their fair market value and that would be your basis in such assets. If neither of these situations apply, you will need to hire a knowledgeable appraiser. Beware not all appraisers are created equal. If you will be hiring an appraiser, you should have him or her do a date of death valuation and a current valuation to help you evaluate any offer.

Thanks for the reply. These are in Oklahoma and there was no valuation on the date of death and this didn’t go to probate court. There was simply no value assigned to the minerals at the time. I have considered hiring a mineral appraisal to do both the retrospective mineral appraisal and also a current valuation as a sort of package deal. The property was producing from some vertical wells at the time of inheritance, but horizontal wells were being drilled not that far off, so I think a case could be made that there was some value associated with the future horizontal drilling. Since then, horizontal drilling has taken off in this area. Of course, with the low prices for oil and gas right now, I don’t want to waste my money valuing the current value of the minerals if the prices of oil and gas are going to shoot up in the near future. Still figuring that out.

You could argue it’s a good time to sell given the low oil price environment, certainly from a tax-perspective at least. Backward looking appraisals are more art than science, but it would be a tough sell to say your minerals are worth more today when oil is trading near $0 than when you inherited them. Horizontal drilling extracts more oil in absolute terms, but it’s also pulling from significantly more land. if you had 2 wells spaced at 80 acres on your minerals drilled around inheritance, that is same as 16 wells spaced at 640. Given real oil prices were likely significantly higher at time of inheritance, I’d think you would owe little to no taxes unless you have been taking significant depletion over the years.

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Right. My decimal interest on vertical wells will be greater than on my horizontal wells. That is a really good point. The vertical wells were really not producing almost anything though. And it was mostly gas at a time when natural gas prices were actually almost as low as today (in the spring of 2016). But yes, the higher oil prices in the past could help make a case for the mineral rights being worth more when I inherited them.

While there may not have been meaningful production at or around the time of inheritance, the value also has to consider potential future production. Applying some broad-stroke assumptions about production and oil price to the scenario I laid out above, you could come up with rough valuation.

Since it would be going to the IRS I don’t plan to do this on my own. I am probably going to hire someone to do the retrospective mineral appraisal. I just want to be familiar with the process.