My parents just signed several gas well leases. Since I do their taxes every year, I have been trying to determine tax handling. According to what I am reading on the internet, a signup bonus and royalties will be taxed as ordinary income and royalties are subject to either cost based depletion or percentage based depletion. I assume since my parents did not get an appraisal on the property including mineral rights, that I will need to use the 15% percentage depletion on the royalties and that percentage depletion does not apply to the signup bonus. Is this correct?
I also read on a different internet site that signup bonuses and royalties can be taxed as a capital gain (i.e. 15%) depending on how long you own the property. This seems too good to be true. Can anyone clarify for me? To further complicate things, one lease that was signed is from inherited mineral rights that was acquired in 1999 (did not include surface property). Is there any special tax handling for it? There was no appraisal at the time of death of the previous owner and up to that point in time, no income had been made from mineral rights.
Is it so complicated that it is time to turn my parents taxes over to a CPA? Would appreciate some advice!