I am selling my mineral rights. I was expecting to pay capital gains taxes on the full amount. But, a land expert said don’t do that. Those minerals have been there for centuries. I should determine the cost basis of the minerals for the day in 1996 when we purchased the property. He said there are no laws in Louisiana for assessing minerals, so I should make an estimate. He suggested something like saying the cost basis of the 80k sale at 56k, resulting in a capital gain of 24k. That would result in a federal tax of $3600 (15% of $24000) rather than 15% of 80k which would be $12000, a rather large savings. He thought that would be conservative enough to satisfy the IRS. He said he has seen several cases like this and never heard of the IRS challenging any of them. Does anybody out there have an opinion about this?
Your legal tax basis is the price you paid (or estate value if inherited) less all depletion deductions since 1996. Your basis can be reduced to zero, but not below zero, by the depletion. Your tax basis has nothing to do with a value for property tax purposes.
I would caution you against this blanket advice. Go to a tax expert for tax advice.
I think a lot of us are potentially facing this issue in the future. The problem is that a lot of these interests were purchased for almost nothing at the dawn of time and only became valuable when new drilling methods kicked in 15 or 20 years ago. It becomes even more complicated when the rights were dumped in a trust years ago and the stepped-up upon death basis calculations are clouded by multiple deaths in a survivor takes all trust situation.
If the problem arises after my death, then it is my beneficiaries’ problem and I won’t care. However, if I pull it out of the trust and sell it, it gets sticky to figure out a proper sales basis.
Obviously, I am not looking for free tax advice (free advice is usually only worth the price paid - zero) as I will pay for that advice when the time comes, but I am still curious as to how others handle this.
This is a valid assessment lol. Free advice isn’t always good advice. Someone above correctly mentioned the depreciation of an asset as well and if you are claiming a cost basis, this property may have been bought for 10,000 50 years ago, has depreciated over those years, and now you receive 100,000 for it… Why not take that as a personal tax at the lower 2.5% versus falsifying a capital gains. Sure the tax man may not get you, but they did get my man Capone.
The basis rules have been around for many decades. It is just that most people ignore the rules or throw away all the paperwork, instead of carefully tracking basis. Tracking means keeping record of original basis less any depletion - down to, but not below, zero. If you have a very low basis in minerals and give it to Child A, then A gets your basis (plus any gift tax paid to IRS but that is a different matter). If Child A gets the minerals at your death, then A has basis of fair market value at your death. If the minerals are placed in an irrevocable trust as part of a gift, then your basis carries over to the trust. When the minerals are distributed to the beneficiaries, then they get the trust basis. If minerals go into a testamentary trust (death), then the trust has basis at date of donor’s death. That basis carries over to the ultimate beneficiaries. There can be a couple differences for particular trust situations. For example, if you put minerals into a living trust, then the trust is not really final until your death and its gets a stepped up basis at that time. This should have been discussed in detail with both your estate attorney and CPA and then basis records maintained, by either the trustee for the trust to hand over to the beneficiaries or by the individual owner. Bottom line is that if an individual or trust has owned the minerals for many decades and there has been a lot of production and depletion, then likely your basis is zero. There are some different rules and calculations where the minerals are instead in a partnership or corporation. It takes time and work to properly maintain detailed records. If you do not want to do it yourself, then you should be paying your CPA or accountant to do that.