Wife inherited royalties in 2011. Keep on getting monthly checks tell she sold them all in 2017. It is my understanding that to figure the taxes you take the value at the time of the sale and you pay 25% recapture tax on the difference of what the sale was.
In addition, you pay capital gains 20% on the value of the time at inheritance compared to the sale price.
So I would pay 25% recapture tax plus capital gains tax of 20%. Is this right?
How do I determine the value at the time of inheritance?
Help appreciated, thanks!
I am NOT an accountant, however as I read your post, I believe you are wrong in your assessment. I would strongly suggest you speak with a tax accountant, I believe you have over complicated your situation.
You pay long-term capital gains on the difference between the sale price and the basis. The basis is the value at inheritance less the cost depletion taken over the years, but not less than zero. If she took percentage depletion, use that to reduce the basis. I think you are mixing up recapture for depreciable assets with depletable minerals. Value at inheritance is should have been determined by estate. Tax accountant is good idea.
RTA, TennisDaze is very knowledgeable on these matters. Also, some areas of Colorado like Weld and Morgan Counties could have some fairly high inherited values in 2011. You should also take note of the "Effective Date" on the deed you signed at the time of sale. The buyer may have the right of recapture of the royalties earned after the Effective Date.
Gary L Hutchinson
Thanks for your reply on this. No value was determined by the estate.
How would one determine this? Monthly royalty average at the time of inheritance X a certain amount of years? Or is there something more scientific than that?
Consult your CPA...don't waste time with a simple tax preparer.
If you inherit minerals, then you likely need to calculate your capital gains. You need to value the mineral rights as of the time of inheritance (usually a date of death or six months afterwards) and you pay capital gains on the difference at the appropriate tax rate...which your CPA will tell you. Otherwise you get to pay taxes on the entire amount.
Are inheritances subject to income tax? I don't believe so.
An inheritance is not taxable at the time you receive the asset. However, RTA's wife inherited the minerals in 2011 and sold them in 2017. Therefore, the difference between the sales price and her basis in 2017 is subject to capital gains tax.
Depending on the size of the estate, inheritance is subject to inheritance tax. I am not certain, but believe the current estate value must be under 4.9M to be tax free.
How do you determine basis on inherited property that is not producing at the time and mineral deeds generally specify "sum of Ten and other dollars cash in hand paid an other good and valuable considerations"? I've heard determine how much documentary stamps were paid at approximately the same time in the same geographical area at the time of inheritance. What is the suggested solution?
minerals are worth something, producing or not. Non-producing minerals are worth $8k + in Blaine Co., OK. In areas not in a play might not bring $250/acre. You owe nothing from an inheritance until you sell unless it is in excess of current inheritance tax limit. That is separate from capital gains. But your cost basis is set on date of inheritance, date of death, or 6 mo. later. There are mineral appraisers. Go to Google and search "mineral appraiser".
Deed stamps are applicable in OK, AR. Non-disclosure states that don't work. And you need to know if minerals are producing or not & if so how much has been produced, the royalty applicable from the OGL., what the NET mineral acres are, to calculate the price per acre. And was it an arm's length transaction.
Go see your tax man before you screw yourself and invite an IRS audit. If inherited you need a valuation for the date of inheritance. That can be performed by a competent MINERAL appraiser (forget the home appraiser).
Google "mineral appraiser" and see what comes up.
Thanks to all that weighed in.
I am in the process of hiring a Oil & Gas Tax attorney this week.
In the mean time, the consensus seem to be:
Value at time of inheritance vs sale, so I would pay capital gains on the difference.
I have read that a generic valuation is your monthly royalty average times anywhere from 36 to 72months equals the value.
Generic numbers lets say 1k a month average times (36 to 72 months, call it 54, middle of the road) x 54 = $54k
sale for 60k then i pay tax on the difference of 6k
is it as easy as that? probably not but that seems to be the majority answer
Am I wrong???
If your wife only owned a Revenue interest, you can play with the income numbers and 2011 Present Value based on well declines times future product values and discount it back to the date of inheritance. However, if she owned the minerals in the ground, she can take credit for the value of the Proved Producing and Proved non-Producing Reserves and determine the Fair Market Value of the reserves at the date of inheritance. Usually a much larger dollar amount.
She should also be aware any other capital gains and losses incurred in 2017 as well as taxable gains subject to Obama care commitments, if any. You may need an accountant more than an attorney at this point.
Gary L Hutchinson
You are confusing Corporation Balance Sheet value with personal cash transaction value before and after a gift is sold. Gifts have a fair market value when received that may not be limited in value to production revenue. The perceived value of a gift at the time it is given can become the stepped up basis for calculating capital gains tax after a gift is sold.
You hit upon the sense of the matter in your last paragraph. Since we have entered an entirely new oil business model with horizontal drilling and fracking technology, long time mineral owners through inheritance are able to monetize the proven non-producing reserves in the ground brought about by the new technology; technology that didn't exist when the declining or unidentified economic resource was inherited. Problem is that most sellers don't bother to find out what the oil in the ground value is and sell by comparison to offers and past production revenue streams.
Check out TennisDaze posts on capital gains. She gets it. I must have 20 date of inheritance evaluations in progress and I can assure you that none of them are limited to the value of a declining asset.
Gary L Hutchinsn