I am trying to determine the value of mineral rights I inherited when my parents passed (at the time of their passing - my last parent passed December 2004). There were no operating wells or leases in place at the time I acquired these mineral rights. Since that time, wells have been drilled and several commodities are being produced. The wells are located in Duchesne County Utah. I am asking to get a general ideal on taxable amount should I sell. I have been told it is the price per barrel when acquired verses the price when sale occurs, should I sell my rights. But I’m thinking gas would be a consideration as well. Any help is appreciated. I’ve searched online and only achieved a higher level of confusion!
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Disclaimer- I’m not a lawyer or CPA, but my experience tells me your basis is zero so you would owe capital gains on 100% of your sales price. Good luck.
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If your parents also gained ownership of that mineral interest through inheritance I expect Todd’s opinion on a zero basis is right, but you might try to pin down when and how your parents acquired that interest.
If you determine they bought it, then I think your basis should be at least as high as their basis was in those minerals, meaning the price they paid for them. If your parents acquired the mineral interest along with the surface interest then their total purchase price would need to be allocated between surface and minerals on some basis.
If you’ve done some reading you’ve probably seen discussion of the “step up in basis” that occurs at the time of inheritance. My understanding, which you’d definitely need to confirm with a CPA or tax attorney, is that the IRS leaves establishing the basis value up to the individual. But that value is definitely subject to challenge, and if IRS audit determines an unreasonable basis amount was used that resulted in underpayment of taxes then penalties and interest are applied.
In other words, you set the number but have to be ready to convince IRS the data and method you used are reasonable. Things that might be considered could include 2004 selling prices for mineral interests, or per acre lease bonus amounts paid in that same area at that time. Since that isn’t public information (at least in Texas) those amounts may be very hard to get your hands on, particularly regarding what was happening 20 years ago.
How far that is worth pursuing will depend on the tax dollars that are at stake.
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Thank you Dusty. This is very helpful. The mineral rights were acquired when my parents purchased land. I think I can get information of lease bonus amounts in 2004 fairly easy. I’ve got my accountant doing some research as well. And the input here is great!
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An individual sent me this information from the IRS, but it seems it’s too good to be true as far as mineral rights…just posting for input…
"“No reporting is required for the sale or exchange of an interest in the following types of property, provided the sale is not related to the sale or exchange of reportable real estate. An interest in surface or subsurface natural resources (for example, water, ores, or other natural deposits) or crops, whether or not such natural resources or crops are severed from the land. For this purpose, the terms “natural resources” and “crops” do not include standing timber.”
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Your basis in minerals would be value in 2004 at time of death, less any depletion that you have claimed over the last 20 years. Your reduced basis after depletion can be as low as zero, but never becomes negative. What value was placed on the minerals when your parents died for estate purposes?
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Thanks Todd…this gets complicated! Help is appreciated!
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Sale of minerals is real estate transaction and must be reported on tax return. It is dangerous to cite any excerpts of statements on taxes without reference to source and full reading of entirety as it may be outdated or only apply under very limited circumstances.
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Assets were included in my parents trust. There was no stated value of the mineral rights, only land descriptions where the rights were reserved. As far as depletion, that is new to me, we have claimed no depletion.
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You need to consult with your CPA about your tax position. Your posts are conflicting. If the trust or you or owner of record has been receiving royalties, then that taxpaying entity would have taken depletion and the basis would be reduced. If royalty income has been received and no depletion was taken, then you may want to consider amending the tax returns. You stated that wells have been drilled and are producing, so I am assuming that someone or trust is getting paid royalties and reporting the income. Did you or trust sign a lease and receive a bonus? Are you or trust an unleased mineral owner in wells?
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I, or rather my trust, own the mineral rights. They are leased, bonus was paid when leases were signed. Wells have been drilled since and I receive royalties. I pay taxes on those, I do have a CPA that does my taxes each year and there has been no mention of depletion or adjustments for such. I will consult with him on that. Your mention of depletion is the first I’ve heard of it.
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Depletion is a 15% deduction from the gross royalties received. On form 1040, royalties are reported on Schedule E and there is a line for depletion. You can also deduct any property taxes on the minerals if that is charged by Utah. If the royalty income is reported on the trust return, then the depletion will deducted on that return. However, to the extent that the royalty income is paid to the beneficiary, then the depletion is allocated between the trust and the beneficiary. So if 100% of the trust income is paid out to you, then you will report the royalty income and the depletion on your return. If no trust income is distributed, then the trust will report all the royalty income and take the depletion on its return. Ask your CPA to show you where the depletion is deducted on the appropriate returns. This is a good time for your to learn the intricacies of federal taxation and to fully understand everything on your tax return(s).
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Does depletion apply only to investors - the following information was sited in an article on depletion allowance on oil and gas, in a section titled Who Can Claim Depletion
“ If a party expresses an economic interest in a mineral property, they can take a deduction for depletion. Economic interest exists once the following conditions apply:
- By investment, there is an acquisition of an interest in mineral deposits.
- There is a legal right to income from the extraction of minerals, which is depended on as a return on capital investment.”
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Thank you for your help. My taxes are pretty simple, with the exception of royalties apparently. Seems it’s time for a sit down with my CPA to get a better understanding and verify depletion is in fact being deducted. He’s pretty sharp, hopefully this has all been taking place as it should. Your information has been very helpful. Thank you!
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Look at your tax returns. Schedule E line 18 will show it
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My line 18 is blank. There is a line with “other” noted and a deduction, but it appears to be oil producing expenses. I’ve got to get with my accountant.
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So, when mineral rights are sold….we’ve discussed value when acquired, step up in basis, depletion, etc. Bottom line, will these considerations be part of the determination of what I owe in taxes on the money received from sale of rights, or will I just be taxed at a certain rate on the amount I receive for my mineral rights? I think one well is all but depleted, but will receive the same amount on the parcel that hosts that well, as a parcel with a newer well.
I’m hoping my accountant is up on this type of transaction, and if not, I am certain there are accountants in the area where my mineral rights are located that have handled sale of mineral rights. But thought I’d just throw out this question.
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You will pay capital gains taxes on the difference of what the value was at the time of acquisition and sales price.
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So depletion really won’t be a factor in the sale, but something to review to make sure it has been considered on annual taxes paid on royalties? I appreciate all of this help!
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If you took depletion, then you must reduce your basis for determining the taxable gain on the sale. You were entitled to take depletion on your tax returns against royalty income (but not against any lease bonus). You are not certain whether your tax preparer deducted any depletion and you need to sit down and review your returns with him. In the future, you should thoroughly review everything on your tax returns and make sure that you understand all the income and deductions. You are responsible for any errors.
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