We inherited 120 acres of mineral rights in weld county. Have recently sold 60 that we owe taxes on. Am trying to determine FMV for these rights in 1985 when we inherited them. Can you shed some light on where I need to go to find this info. Do not want to pay taxes on current FMV.
I also have this issue, how to determine value from date of inheritance.
If the value at the time you inherited the property was low, you may be wasting your time. I suspect that the value in 1985 was low. If the value was $50 per acre in 1985 you would save 15% tax on $3,000 but if you had to justify the value, it could cost you more than you would have saved.
Just curious, did you sell without knowing the tax implications first?
No, but I've had several differing opinions. They say if you go to 10 tax accountants each will come up with a different number. I was just curious as to another opinion ;) Thank you for yours.
May I ask what you think the minerals were worth? Not the basis value you wish they had when you received them but what you really think they were worth? How much do you really think you have to gain?
In your position, I would be studying exploration in Weld county. If there was no boom about the time you received your minerals I would believe the value at the time was low. I would ask Gary Hutchinson if he would give me his opinion, I would not ask him for an in depth analysis, it's too much like real work.
Were the minerals leased when you inherited them or were there producing wells? If not, the value in 1985 would most likely have been very low. A family member of mine passed away in 2005 and the minerals were valued by the executor at $1.00 per acre since they were not leased or being produced.
Dave,
In 1985 the Wattenberg Field was under development in at least 3 separate formations for both oil and gas. The Codell was then the hottest play in the area, adding speculative value to the proven and proven undeveloped reserve values. Of course, value is site specific but most of the Wattenberg is in Weld County. Comparing local activity of prices,permitting, drilling, production and completions in the months leading up to the time of death with your exact location will provide a reasonable expected value at that time. 1099's for 1985, although helpful will only provide you with a part of the story. Try the CO Oil and gas Commission or commercial industry data bases for historical data.
The higher the base value you attribute to the rights, the less capital gains you will be required to pay. The process is somewhat arbitrary as the IRS does not generally question your base value. The more they were worth the better.
REMOVED BY SITE ADMIN
Dear Mr. Bock
If they were inherited minerals and the estate was probated, there should be of record an inventory of the estate and records of the filing of an estate tax return. The inventory will show the value assigned on the DATE of death.
Your cost basis is the value of the minerals established by the inventory. If you have a hard number there, no matter what anybody else says, it is not an arbitrary number that you assign. If the estate was probated correctly, then your cost basis has already been determined by the probate court and accepted by the IRS.
As to your sale, in any event, you do not pay taxes on FMV (as you said in your question), unless the sale was not an arms length transaction. You pay a capital gains tax on the difference between your sale price and your cost basis.
Best
Buddy CottenIt is always better to deed minerals before death so that probating is not an issue, or have a living trust. At that point you can assign your own value based current economic conditions.
Bertram,
It is not always better. The heirs may have no tax burden with a smaller estate, but run into gift tax issues if conveyed before death. There is always the sometimes real good option of transferring the rights into a Family Mineral Trust, which is constructed WAY different than a living trust.
Anybody who reads this, please pay attention to tax advisors, not me or most others on this board. This is far too difficult as topic *tax effect* and seems to be a moving target depending on which way the winds blow in Washington. Whichever way they blow, you can always smell the stench of politics.
Buddy Cotten
Bertram Sippy said:It is always better to deed minerals before death so that probating is not an issue, or have a living trust. At that point you can assign your own value based current economic conditions.
Buddy you are correct I don't know what is best in all cases, depending on the complexity of an estate or tax policy. I only know from my own experience what has worked for me. I formed a living trust in 1998 to hold assets, business, investment, real estates and minerals. I have not considered forming a separate entity for just the minerals. I will read up on the Family Mineral Trust.
Thanks
The value should be set at the instant of death, not the value at inheritance.'
Buddy Cotten
Marilyn Kiger said:I also have this issue, how to determine value from date of inheritance.
Since I have been getting the most info from you let me add a twist to this whole thing. Two sisters initially bought 240 acres together. One sister moved to Wisconsin and the other remained in Colorado. The WI sister died first and because of CO law all of the 240 acres went to the CO sister. We knew the intent was to have heirs of both sisters share in the acres. In 2013, the only heir of the WI sister wanted to sell some of his acres but found out that he didn't actually own them. An attorney acting on the behalf of my wife and the cousin prepared the necessary paperwork to give each person equal shares of 120 acres. These documents went thru probate in late 2013. My question is now, can FMV be determined from the date of that probate? What would your take be on this?
Dave
Buddy Cotten said:
Dear Mr. Bock
If they were inherited minerals and the estate was probated, there should be of record an inventory of the estate and records of the filing of an estate tax return. The inventory will show the value assigned on the DATE of death.
Your cost basis is the value of the minerals established by the inventory. If you have a hard number there, no matter what anybody else says, it is not an arbitrary number that you assign. If the estate was probated correctly, then your cost basis has already been determined by the probate court and accepted by the IRS.
As to your sale, in any event, you do not pay taxes on FMV (as you said in your question), unless the sale was not an arms length transaction. You pay a capital gains tax on the difference between your sale price and your cost basis.
Best
Hi, I appraise mineral properties all over Weld County. I recently appraised one mineral property as of 1979. Before that I did one as of 2006, so I am familiar with "setting the clock back". My clients were attorneys and my expert report was needed for a court case. The good news is that I am competent to do such appraisals, the bad news is that it is costly. You are looking at a minimum of $1,000-$2,000 for a certified report.
Regards,
John B. Gustavson
Certified Minerals Appraiser
It is possible to value an estate at any date in the past provided someone has the access to such recorded sales or other information. I am assuming that is Weld Co., Colorado? Oklahoma and Arkansas are the only two states that I know require deed (documentary) stamps and AR did not require it until 2006 when the Atty. General opinion made it so. In OK you can find out what comparable sales of minerals sold for by going to the court house and looking up the deed. If 40 acres sold and the documentary stamp is $30.00, then the stamp is $1.50 per 1000, so the property sold for $20,000 or $500 per acre.
In Colorado, you would have to find a local mineral appraiser to estimate the value and who had historical data in their files of sales.
And John above is probably the best such appraiser in the U. S.
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Thanks for the kind words, Terrell. Let me add to your point that I just used that method of finding comparable mineral sales in Noble County, Ohio. That county is in the Fairway of the Utica shale boom. Some farmers are selling their leased minerals near recently drilled horizontal wells.
I found a sale at exactly 2 times the going average lease bonus of the county, which supports a rough rule-of-thumb of shale mineral value. The price was not in the filed deed, but the Recorder's stamp in the upper left corner neatly recorded the filing fee. Back-calculation gave the price of the trade.
Weld County, Colorado has electronic records available for public search, and the Colorado Oil & Gas Conservation Commission has excellent GIS mapping of all wells. There are also links to many historic documents. Dave Bock would not have difficulty setting the clock back to 1985 and see, what went on in the area at that time. Yes, the Codell play was at its prime, but we need to know at least township and range to comment further.
Regards,
John
Ohio and Pennsylvania are interesting trends. I know a couple of appraisers in that region who are doing mineral valuations. PA lacks monthly production records making their situation even more difficult.
When I have both sales and production, I feel like the valuation is more reliable - especially for banks as they seem to think these valuations are some sort of precision "truths" rather than estimates and opinions.
Pennsylvania is now considering enacting monthly reporting, as we speak. That would help.
John