Transferring mineral rights to family member: what are the tax implications?

My mother inherited rights from her mother. She now would like to transfer them to me. I have someone helping me with the transfer paperwork, but they were not knowledgeable about the tax implications for the transfer. Does the transfer of these rights constitute a gift from her to me, subject to the >$15k gift annual gift tax? If so, how do I know the value of the rights? After the transfer, will either of us receive tax documents additional to the ones related to royalty payments? Any help or guidance would be helpful. Thank you!

I should add that we both live out of state.

The issues you face are

Gift tax return Here is some good information here. Article

Capital Gains is another issue. Capital gains are calculated on the difference between the price you bought an asset and the price that it is sold. If you receive the property as a gift, the basis to calculate the capital gains tax is based upon the your giver’s basis in the property. In the case of inherited assets, basis becomes the value at the time of death. This is generally known as stepped-up basis.

Lets assume that value when your mother inherited was $1,000 and is now worth $10,000. Compare gift vs. inheritance. If mom deeds the property to you and you sell it, you will have a $9,000 capital gain (Difference between $10k & $1k) If you inherit the property when it is valued at $10k then sell it for $10k, then you have no capital gains.

Generally, it is better to inherit through a will, trust or transfer on death deed than to receive it a current gift.
Also, there are additional implications in the event that your mother needs medicaid in the future.

As stated in a prior post, your mother has annual gift tax exclusion of $15,000 per donee, and under current law a lifetime federal gift tax exemption of $11,580,000, less prior taxable gifts. If you receive a gift, you receive a carryover basis from the donor—in other words you receive the donor’s basis in the gifted property. In you inherit property due to the death of the owner, you receive a new basis for income tax purposes equal to the fair market value of the property on the date of the owner’s death. Whether property is received by gift or inheritance, the fair market value of the property will need to be determined. The method used for such determination will depend on the magnitude of the gift or inheritance. For large transfers, a professional valuation firm will need to be engaged. Smaller gifts may be valued using various rules of thumb. Whether to receive by gift or inheritance involves the consideration of numerous factors so a knowledgeable estate planning attorney should be engaged to explain options, including trust options or combining entity options with trust options, or possibly just an entity option. If entity option is used, the minerals would be transferred to entity first and then entity interests would be received by gift or inheritance. The structure of the entity would be important for tax purposes and one size does not affect all. If qualification for Medicaid is a possibility in the future, then consult an elder law attorney. The value of the minerals will determine which planning options would be the most appropriate. If there is a possibility you could get divorced, then an irrevocable trust for your benefit becomes important to consider so family property is not lost in a divorce.


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