Tax implications-mineral rights sale and life estate


I am seriously considering selling mineral rights in Lea County NM, and am having trouble getting a clear idea of the tax impacts. It's a complicated situation that I haven't seen anywhere else.

Back in 2014 my father assigned his mineral rights as follows - my sister and I were named as Remainderman, with my step mother as Life Estate. All the acreage is held by leases with the same producer, one portion with a producing gas well (though declining after several years) and the adjacent smaller portion undeveloped. Dad died back in June 2015.

My step mother received an offer to sell last fall - she needed the money and encouraged us to sell. Instead, we bought out her life estate in December and now have full ownership of the mineral rights.

For tax purposes, how do we determine the tax basis if we want to sell, and will the capital gains timing (short vs long) be determined by the date my father died or when we purchased the Life Estate? It's been 2 years since he died but only 6 months since we bought the life estate. And in the last 6 months, the offer price for the acreage has more than doubled, from approx $6k to $14+k.

So... if we're considering selling now, and we look at the life estate date it will be short term capital gains (full income rate, maybe 39%) vs long term gains (at 20%). If we can use the date of death, it will be long term regardless of when we sell it.

Do I have the reasoning correct ? I know I will have to find professional tax help, but it would be really useful to know if we have to wait another 6 months in order for the lower tax rate to kick in.



PS...yes, I know you should never sell mineral rights, but we're at retirement age. The money would make a big difference now, but not so much in 10-20 years... and not willing to have the current price bubble for rights collapse.


First of all, the prices you are being offered do not have anything to do with a price bubble. There has been enough drilling and production to prove that the oil is there and we know how to get it out at a profit.. The price increase is due to an increase in proven undeveloped oil in the ground. The risk of finding oil is nil. You are experiencing the effects of the New Oil Business. In fact, with patience, you will be able to do considerably better than $14K/nma. The risk you take in signing a offer sheet now or later is in getting the money in a timely manner or in full.

My experience with life trusts involving mineral rights is that you and your sister became the minerals owners upon your father's death with the caveat that you couldn't sell the minerals until after you mother died plus she would be the beneficiary of revenue from the minerals during her life time. Before you agree to sell, better make certain that by buying you mother out, you didn't break any tax laws attributable to a trust and its tax advantages. You may want to change the buyout to a loan outside the trust. Your lawyer will know. If your father's trust allowed a tax free transfer of ownership in 2015, you may not want to jeopardize that situation.

The lawyer that set up the life trust for your parents should know if you violated the trust tax provisions by buying your mother out. The estate lawyer should also be able to tell you what the tax rate is for capital gains tax on oil and gas minerals. I think it is 15% of the net sale proceeds minus the fair market value at the date of death. In June 2015, the FMV will be a high number. Maybe more than your anticipated sales. Only a detailed scientific appraisal will determine the FMV 6/15. Of course, other capital gains and losses must be taken into consideration for the year in which the minerals are sold.

In addition, there may be an additional tax tariff slapped on capital gains by Obama Care. 3%+ has been reported.

Take you time and do this right. The minerals aren't going anywhere and if Obama Care is repealed this year, the extra burden may also go away.

By the way, with the new oil business, there are good financial reasons to sell minerals for people at retirement age. How and when are most important.

Gary L Hutchinson