Gifted Mineral Rights

Accounting and Taxes
1

My wife and I recently gifted our mineral rights to our 3 children, is that subject to the gift tax for federal gift tax laws. If so, how do we determine the value? The property is producing and paying royalties.

Thanks--JW

2

JW,

My understanding is that the gifted minerals are not taxed. But the royalties from the wells will be taxed.

Clint Liles

3

Sounds good to me Clint. Do you have any kind of IRS reference?

4

JW,

I'm going by my mother as she 'Gift Warranty Deed' her surface and minerals to the ranch to my sister, brother, and me December, 1996. We have paid taxes on lease bonus monies and that's all. Also property taxes are paid annually on the surface acreage.

Clint Liles

J W Flowers said:

Sounds good to me Clint. Do you have any kind of IRS reference?

5

Talk to a good CPA.

Yes the property has a value. Producing properties value can be determined by many Petroleum Engineers. I've also seen value placed on them by 3-5 times the yearly income. It the value exceeds the gift tax exemption rates, then yes it is subject to gift taxes. 2014 rate is $14,000 per person. There are several ways to make the transfer and avoid taxes, but in this case it may be too late to undo what has been done.

Here is some info to read.

http://wills.about.com/od/understandingestatetaxes/qt/Gift-Tax-Exclusion-Annual-Exclusion-Vs-Lifetime-Exemption.htm

6

JW-

The gifted minerals are subject to the $14,000/28,000 limits per child, so you should file a gift tax return if it exceeded that amount. It starts the clock running on the IRS' ability to challenge the value you place on the gift.

As for valuation, that can get complicated.

7

How would the value of the royalties be determined?

We have been receiving approximately $5,000 per year total in royalties during the past 5 years.

Thanks for the previous replies.

JW

8

The IRS will generally not challenge a value of 3x annual royalties or higher.

9

Thanks Wade, since we gifted to 3 children I won't have to file a gift tax form with my income tax. Anything I don't have to do for the IRS is good news.

10

You might want to look at the instructions for the Gift tax , Form 709.

It will likely confirm what others have told you;

http://www.irs.gov/pub/irs-pdf/i709.pdf

11

The county tax assessor will show a mineral value for the property on the tax roll every year.