Long Term Capital Gains

Accounting and Taxes
1

Have owned mineral rights on 325 acres in Colorado for almost 100 years. In 2011, leased the mineral rights to an oil company for $10,000 one-time payment. Since then, have received $25,000 in royalties on a producing well drilled in 2012.

Sold the mineral rights (lease and royalties) last year for $50,000.

What is my basis for calculating a long term capital gain?

2

I would imagine that the family or individual did not have the complete ownership in one name for the entire 100 years. When someone passed the new owner would have a tax basis based on value at transfer of ownership. If that was not so recent and the owner did in fact own the mineral rights for 100 years the basis should be on purchase price 100 years ago. That would be next to nothing and I wouldn't waste the time. If it was acquired and appraised more recently that would change the situation but I doubt that much.

Why would you sell for $50,000 with that kind of acreage after receiving $35,000 in 5 years? With only one well on that acreage eventually more wells would have been drilled and the gain in the long term should be higher than $50,000 right now.

3

Thanks for the reply. If I understand your answer, the cost basis would be $0.00?, so the entire $50,000 would be subject to capital gains? None of the bonus or royalty would be considered to calculate the basis?

Selling for medical reasons.

4

Unless you paid something for it the cost basis should be zero. Correct.

5

Again, thanks. One final question, spent $3,000 to get all the probates done to get a marketable title several years ago...could that be considered?

6

Yes. Did you pay any inheritance tax on the value or was the value of the mineral interest zero?

7

Didn't pay any inheritance tax.

This may all be moot since I haven't done my taxes yet and I have a short term and long term carry over loss from prior years in excess of $100,000. So, I think I will still have a $3,000 deduction allowed.

Just trying to figure out how to figure the cost basis on the sale.

So...in summary, can't use the original cost (wasn't any) or if there was, have no way to calculate from 100 years ago, can't use the sign-on bonus or the royalties, but can use the probate cost to establish a cost basis to help reduce the $50,000 capital gain. Correct?

Thanks

8

Yes.