Anyone have any idea how to figure out what mineral rights were worth in 1995? My mother inherited a few acres when my grandfather died in 1995 and sold them in 2019. Anyone by chance sell anything around that time or can point me to a place to get an idea of what they worth when inherited? Thanks. Sec 33-5-6
1 Like
This will be difficult to determine with certainty. If the minerals were producing in 1995, you might get a ballpark figure by assigning a multiple of annual production. e.g. The value could be estimated at 3x to 5x the dollar value of royalties paid in 1995, depending on market conditions. Valuation will be more difficult if it was not producing. In that case you might have a record of purchase offers or lease bonuses paid in that township at that time. Is this in connection with estate tax concerns?
You can observe professionals who provide services to mineral owners in our Mineral Services Directory. These are often able to provide specific services that meet your needs.
MRF Administration
This is for taxes due for 2019. Not estate taxes
Hi @barbarian54! What you’re looking for is a “Retrospective Appraisal” and can be done by a mineral appraiser (as mentioned, the Directory has some listings). The IRS allows an engineer or other such professional to appraise the value of minerals retrospectively to the date of inheritance.
Granted, the landscape in 1995 was MUCH different than now and information not available after 1995 cannot be used in the appraisal, but it looks like the section you mention had production starting in the 1940’s and still producing today. This makes for a much more certain case of value that can be reported to reduce your capital gains tax (by establishing a stepped-up basis). The producing wells at the time would be valued, along with any additional potential undeveloped reserves.
Did your Grandfather go thru a Probate in 1995? Assets are shown with value there usually. The Probate is usually filed with a County Clerk when received from the court - The Court Clerk would also have the original. But the County Clerks records are on-line.
No probate. Anyone used one of these appraisers that they recommend?
I am not a lawyer or a tax accountant, but I’ll tell you of another method (assuming the property was NOT producing in 1995) that I think should be fine.
I believe you would be entitled to use a retrospective method for arriving at your retrospective valuation. I’ve been managing our Oklahoma (and some Texas) mineral properties since 1984. Until Oklahoma did away with its inheritance tax, the Oklahoma Tax Commission provided a method that was accepted by them and the IRS for evaluating non-producing oil & gas properties for tax purposes in Oklahoma. They published an annual list, by county, of standard valuations per acre for estate-tax purposes, covering the entire state. I no longer have a 1995 copy of that list, but you might be able to get one from the Oklahoma Tax Commission or from a tax accounting firm in the area. I believe you would be safe just using this value times your net mineral acreage for your present purpose. This is assuming that you don’t find the valuation from the probate documents of your grandfather’s estate.
Rudy
Rudy does present a way to come up with a valuation as of 1995, and likely much cheaper than hiring an appraiser. This would be a decent option if you mineral sale was less than $20,000 since the cost to hire an appraiser would be more than the potential capital gains savings.
But for larger sales, I do want to point out that it would be in the mineral owner’s best interest to determine which method would maximize the value of the property upon inheritance. This may be different for each individual property. In some instances, a generic $/nma might get you a larger taxable value (which for capital gains tax, the larger initial value the better), while in other instances the producing wells and undeveloped acreage could be worth significantly more than average.
More detailed methods will be able to account for more nuance, and this will tend to increase the property value (though obviously not guaranteed; accuracy does not always work in your favor…).
Also, I would caution against blindly using the valuation from probate. Those valuations rarely involved a mineral appraiser/engineer, and could be using very generic valuation methods (or passed down generation to generation). Again, this could possibly be in your favor, but I recently saw one with Reeves County acreage (Permian Basin) valued at under $10/nma when it should have been closer to $500/nma. These probate valuations can be *(I’m not an accountant or tax specialist; this is just what a select few have told me) overruled by a formal mineral appraisal if performed according to IRS standards, so long as there hadn’t already been a value established for tax purposes (for example, if you had it appraised properly upon inheritance due to your state’s estate tax reasons, that appraisal would have set the value).
1 Like
Tracy, can you expound on your statement that “these probate valuations can be overruled by a formal mineral appraisal if performed according to IRS standards, so long as there hadn’t already been a value established for tax purposes”. Aren’t all probate valuations done to establish a value for tax purposes? What are the circumstances where a probate valuation can be overruled by a formal mineral appraisal? In my case our minerals were likely WAY undervalued for the Estate, as the valuation was done by an accounting firm with little experience in minerals. I’ve always assumed I was just stuck with that valuation. Is that not the case?
Sure thing!
First things first though, I’m not an accountant or tax specialist, and I’d recommend reviewing your specific case with one before taking any of my advice.
My basis for that statement was a combination of information from accountants my clients have worked with in the past, experience from Certified Mineral Appraisers, and my own research into the matter.
From the IRS Tax Code 4.41.1.3.9.6 (07-31-2002) (https://www.irs.gov/irm/part4/irm_04-041-001)
(7) Valuations of Oil and Gas Producing Properties1. A valuation of an oil and/or gas property is an engineering issue and, if the tax consequences warrant, should be referred for engineering services.
Tracy’s interpretation: the IRS prefers a licensed engineer over an accountant’s valuation
From Treas. Reg. 1.611–2(d) https://www.govinfo.gov/content/pkg/CFR-2012-title26-vol7/pdf/CFR-2012-title26-vol7-sec1-611-2.pdf
(d) Determination of fair market value of mineral properties, and improvements, if any.
(1) If the fair market value of the mineral property and improvements at a specified date is to be determined for the purpose of ascertaining the basis, such value must be determined, subject to approval or revision by the district director, by the owner of such property and improvements in the light of the conditions and circumstances known at that date, regardless of later discoveries or developments or subsequent improvements in methods of extraction and treatment of the mineral product. The district director will give due weight and consideration to any and all factors and evidence having a bearing on the market value, such as cost, actual sales and transfers of similar properties and improvements, bona fide offers, market value of stock or shares, royalties and rentals, valuation for local or State taxation, partnership accountings, records of litigation in which the value of the property and improvements was in question, the amount at which the property and improvements may have been inventoried or appraised in probate or similar proceedings, and disinterested appraisals by approved methods.
(2) If the fair market value must be ascertained as of a certain date, analytical appraisal methods of valuation, such as the present value method will not be used: (i) If the value of a mineral property and improvements, if any, can be determined upon the basis of cost or comparative values and replacement value of equipment, or (ii) If the fair market value can reasonably be determined by any other method. (see Green v. United States, 460 F.2d 412 | Casetext Search + Citator
Tracy’s Interpretation: Probate appraisals and inventories is a separate item from a “disinterested appraisal by approved methods” and just one of many things considered. Approved methods would establish a Fair Market Value, prioritizing cost methods or comparative value methods before an analytical income method could be used.
- Cost Method: The cost it would take to recreate the asset. This rarely a valid approach for oil and gas mineral interest value as exploration costs are not public data, and you can’t very well pay to recreate the oil and gas underground.
- Comparative Sales Method: What similar properties are selling for. This assumes there are market comps available, that you can prove they were arms-length fair-market-value transactions, and that you can reasonably compare the properties in terms $/acre, $/reserve, or some other metric. This is a problem for most properties because a) most sales data is not public, b) the amount of reserves remaining can vary drastically property to property, making it difficult to determine if the sale is comparative, c) even if you can determine (a) and (b), you would then need to determine if the sale was arms-length and truly fair market value. It get’s messy very fast for oil & gas.
- Income Method: the fair market value of the projected income stream. For producing oil and gas properties, this is often the most reliable/credible method to determine a fair market value, especially retrospectively when comps are even harder to establish.
That said, if the probate process has sufficient support that the mineral appraisal really is fair market value (there could have been more effort than just generic county averages applied), then that might take precedent and your tax professional should advise you.
Also I could be completely wrong with my interpretations above, as I’ve yet to find anyone on the “inside” to confirm or deny.
1 Like
Tracy just touched on a question that I suddenly (as of last night, actually) need a rough answer for. Her reference to the cost to hire an appraiser is the issue.
Because of a legal separation on the part of one of the members of our LLC, I’m about to have to re-evaluate the LLC as of a particular date. Since the purpose of valuation is a separation (and maybe eventually divorce) negotiation, I’m going to be asked some questions. I feel quite comfortable with the method I’ve always used, and I’ve never hired an appraiser for a mineral-only property, but one of the things I’m going to need to know is the likely cost of doing this. I’ve certainly never regarded it as cost-effecting in any of our particular situations, and we hold about 100 mostly small properties, so there’s a large multiplier here. But can the folks here give me a ball-park average cost, for a single mineral-property appraisal, to use in such a discussion?
Rudy
I’m sorry to hear that Rudy, considering most mineral LLC’s are family members 
.
Treading very lightly and with large ranges due to this being a public forum and there being a wide range of appraisal firm sizes and price structures, the mineral appraiser is typically a professionally licensed engineer or geologist who would be performing a professional service to be used for formal purposes (so, a few pricey things stacking up on the cost). Most professionals at that level (or firms who employ them) end up being $150-500/hr, though projects can be assessed on a flat rate, hourly, or a combination of the two. Depending on the complexity of the property and resources available to the appraiser, it would likely take the individual 16-40 billable hours to complete.
Thanks, Tracy.
Yes, it is indeed sad.
I appreciate the cost information, and even if I use the low end on both hourly rates and hours required, the decision is a pretty clear one. I don’t think I’ll have any trouble over this.
Rudy
Rudy, exactly why I don’t promote multi- member LLC. Everybody’s life’s are different.
Well, I personally don’t see any problem here from the viewpoint of the LLC. I just want to be prepared for the discussion that will happen about my valuation. And, of course, I’m very sorry that one of our members is going through this.
Rudy
Another way to get a retroactive valuation is to use the historical valuation that, at least in the Texas county where we have mineral interests, are listed on the county tax appraiser website.
This topic was automatically closed after 90 days. New replies are no longer allowed.