Valuation/Appraisal for cost basis of inherited mineral rights

The heirs to my grandfather's will share in seven different mineral rights parcels in Weld County. The last inheritance passed in 2006. Some of the heirs have sold their mineral rights and are having a difficult time arriving at a cost basis for the taxman. One of the frequent contributors to these forums wanted a fortune to appraise these rights. Can anyone shed any light on this for us?

I am newbie to mineral rights etc. But I can share what I've been told--and what I'm sticking to, if the IRS asks. lol You look at what "similar" parcels in the area were valued at on the date of inheritance. Can get that from what companies were buying the acreage for and then do the math. The other part I learned is that the inheritance isn't official until the Deed has been transferred. Mine required Probate. So once the Probate was finalized, that is the date for valuation. Sometimes the value is established during the Probate.

Having said all that, I am not an expert. This is just what I have learned through my own personal process. Hope that helps. G


The circumstances of the properties near the date of death of the benefactors is commonly used in an appraisal.

The most objective condition is actual production revenue as production payments indicate PROVEN RESERVES as defend by several governmental agencies. The mineral activity in the area of the properties can also be used in a subjective manner, particularly when the benefactor or personal representatives have had purchase offers near the date of death.

In 2006, portions of Weld County had been in production since 1950's. The wattenburg field had been proven to have multiple zone production potential thereby adding to the date of death appraisal in certain areas. Mineral owners prior to 2006 had also put a high value on coal rights that is well documented by real estate development regulatory bodies. Horizontal drilling of the Niobrara was in its infancy but the Niobrara formation had been well defined and tested.

If the parcels are wide spread, developing the value at DOD for each parcel may be expensive to evaluate through engineering and geologic potential means. However, if the heirs who haven't sold, contemplate selling, they may want to share in the cost as they will be able to use it when they sell. If the net acreage sold is scattered and small there are some rules of thumb that can be applied with little fear of an audit. Consider asking an accountant with mineral experience whether or not an official appraisal is needed or common sense rules may be applied.

A fair appraisal cost will be more a function of how many parcels must be evaluated rather than the actual market value after the fact or the net acres sold. As an alternative, the sellers may have obtained a "fairness" opinion prior to accepting an offer. That fairness opinion may have included a cost basis component.

If you can agree on a scope of work, most appraisers will give you a range of fees from minimum to a not to exceed amount.

The probabate was quick and easy since the will was simple and there were only two heirs. I understand the concept of what you say, but how does one go about finding a buyer or seller that was active almost nine years ago?

I felt that an estimate of $12,000.oo to appraise seven parcels all with extensive documentation and history to be way out of line. For that price I may as well just make up a cost per net mineral acre for the basis and hope that the IRS is not in an inquisitive mood when my return goes through their system.

The personal representative that distributed the assets at the order of probate may have had some files of the deceased that included offers, leases, production check stubs, etc. If no files are available, the county records may contain evidence of leasing or land transfers in the immediate area around that time. Colorado Oil and Gas Commission records for the area will show production, well permit applications, completion permits and well production records.

An appraiser would have to look into the records to determine mineral activity at the time. Absent the deceased files or probate court records, a study of the area activity should be sufficient to provide an educated estimate of the value at DOD or, in other words, determine the expectation of the benefactor in the months before death had he or she hired an expert to assess the value at the time. Appraisals are estimates. The more facts that are present in the appraisal, the more accurate they become. If reasonable, the IRS will usually not get its experts to re-value but merely confirm some of the facts and calculations used for the estimate.

I subscribe to a few oil and gas data bases that can provide the necessary data or leads. "Friend" me and I will give you an idea of data availability for your specific property in confidence.

Gary Hutchinson

We are currently active in Weld County and offer a free mineral appraisal service. I have PM'd you our telephone number. Let me know if you are interested.