I recently sold a lease to Hunt Oil for a significant amount. On the 1099 they report it as rent but throughout the sale it is referred to as a sale and it was recorded as a sale. I assumed it would be reported as a capital gain on the 1099. However, by reporting it as rent one would be obligated to pay regular income tax on it. Which is correct?
If you owned a lease and sold that lease more than one year after you bought it, that qualifies as a capital gain. But, if you leased some minerals that you own and were paid a bonus consideration, the bonus is ordinary income. Hence the 1099 showing it as rent.
Consult with your accountant to be sure.
If you leased minerals, then the bonus is treated as ordinary income, not capital gains. Generally reported on Schedule E on rents line and you can deduct related direct expenses such as legal fees. If you sold your minerals, that would be subject to capital gains. If you sold all future revenues from an existing lease, that would be capital gains.
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Thanks so much. I’ve owned the lease (inherited it from my father) for 52 years, so in my book that qualifies as a capital gain.
Consult your CPA as to the proper treatment of the revenues as you seem to have sold 100% of your interest and kept nothing. If it is capital gains, then You need to contact Hunt Oil and get a corrected 1099 issued.
What is the date of the original lease? Quite uncommon for a lease to be HBP for 52 years!
If the purchased an actual lease then they shouldn’t have sent you a 1099 period. Make them correct it. It’s your job to report the income, not there’s. And if they don’t correct it, it will cause a flag in the system. Your accountant can also claim the income as they have it, then deduduct it with a note in the taxes explaining why you did that. Not an accountant, but that’s what I’ve been told. Check with your accountant
1966 - There has been continuous activity on the lease the entire time with numerous consecutive operators owning the majority interest . (Glasscock County, Texas)
You should take the documents related to the transaction to your CPA and your attorney to have them reviewed to determine the tax consequences to you. If the company has made an error in the proper tax reporting, your CPA should contact the company to have the tax reporting corrected. Although it is possible to use footnotes to your return to explain incorrect tax reporting, that is just one step closer to having your return audited to look for other issues.
Julia- sounds like a capital gains case. Your basis will be the value at the time of your fathers’s death. Your gain will be the sales price, less that basis less expenses involved in the sale. Good luck.
I did contact Hunt Oil and they are sending a corrected tax form. I did a little research and Section 1 of the IRS Oil and Gas Handbook 4.41.1.4.1 (10-01-2005) states “If the transaction is a sale, the income may be treated as either ordinary income or capital gain”. There are some conditions, but my sale doesn’t fall into those exemptions. The valuation of the cost basis is complicated but since the lease was created just a year before the death of my father - it’s pretty much a moot point. There are a few small costs associated with the sale of the lease, but not substantial.
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