What role does date of death value play in tax liability?


#1

Family member died in 1987, leaving me mineral rights which I sold in 2012 for $275,000. I did not file taxes since 2010 but received a letter from the IRS asking about 2012. Trying to clarify what role, if any, does the value of the mineral rights in 1987 play.

My best assessment:

Value of mineral rights in 1987 is determined to be $50,000. Would that mean I owe taxes on $225,000 vs the full $275,000? If so, how should this be reported to the IRS?

I know I need expert advice, and I am supposedly receiving it, just trying to see if they are on the right track. They seem great at taxes but new to mineral rights. I can’t afford several thousand on an attorney or mineral rights expert.

Any guidance is appreciated.


#2

Mary,

Good morning. With the typical caveats that this is not tax advice, your basic assumptions are correct. Your basis in the minerals is the value on the date you inherited them and you would be responsible to pay taxes for gain in excess of that basis.


#3

Thanks for your response. May I further inquire to you or the greater audience-

I could see how this could be very complex… there are all kinds of factors that could impact the legacy FMV. I am privy to some transactions in the area that occurred in the years leading up to the inheritance - if I am conservative, is it appropriate to ballpark a figure? How much research, if any, would the IRS put into this and are they generally fair and reasonable?

I guess what I’m asking-- Is there a general standard by which the opinion on value be based or would declaring around 50% be usual and customary?

It is my intent to be absolutely transparent and honest with these figures. Just trying to figure out how much sweat and dollars needs to be contributed for the appraisal to be considered acceptable.


#4

Mary,

These are all good questions. The most bullet proof approach would be to have a valuation done as of the date you inherited the minerals. These valuations are done typically in a fashion to withstand IRS scrutiny. That being said, they can be costly and time consuming and not necessary for every mineral transaction. Where are you located? Im happy to recommend someone if you want to go down this route.

I think the approach of searching comps and coming up for a reasonable, good faith basis is likely fine. I would keep detailed records and back up in the event that the IRS comes calling.


#5

Hey, sorry to interrupt, but could you recommend anyone for a possible appraisal for mineral rights located in Michigan? The mineral rights are surrounded by a storage field and I may have to develop the asset for legal reasons now. Any referral(s) would be highly appreciated! Currently looking at deep formations but issues at shallower formation?


#6

Hi Tim,

I don’t have a specific referral for a mineral appraiser in Michigan. Where are you located? Perhaps I can dig up someone and help out.