This seems like an odd topic at a time when there is probably not much interest in buying, however, I was curious to know how the rise (or fall) in value from the time of inheritance to the time of sale is determined when paying capital gains tax
The capital gains tax is based upon the value of the minerals at the date of death. Sale of minerals value-value of minerals at the date of death is what the capital gains is based upon. And other factors such as your income for the rate. So the sale value is what changes, not the date death value.
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Thanks @M_Barnes
What are those two (time of death and time of sale) values based on if the land is not leased or leased but not being drilled on?
It will be valued depending upon where it is located, what possible reservoirs are there, what sales were made in the nearby areas at the time of death, what leasing prices were at that same time. It can be hard to estimate if there is no production and no leasing. Some places might be $50/ac, some might be $1.00. Oil country or gas country will make a difference as well.
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The date of death sales value is based on a retrospective mineral appraisal. I think that if there was any oil and gas production when you inherited your mineral rights, then there will have been some value associated with them and you can reduce what you have to pay in long term capital gains.
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Whether the land was leased or being drilled actually doesn’t play into the evaluation as much as what the activity is in the surrounding area. For example, if your grandma owned a condo in a downtown area that is a hot rental market and then you inherited it, the appraisal would be in line with those around her being bought/sold/rented even if she never had it for sale and never rented it out. It’s based on IF you had leased/sold, what it SHOULD go for.
An easy way to show greater than $0 value is if there is an offer letter from around the time of inheritance, even if it wasn’t acted upon. That’s a great starting point if you can find one on file. Most offers are quite a bit lower than actual value though (since a single initial offer lacks competition or negotiation), so that’d be the low end.
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Quick note on my above comment: I want to add for clarification that an unsolicited offer does NOT qualify as a basis for an appraisal, especially for tax appraisal purposes, since unsolicited offers are low and not actually a fair market value. But it’s more firm an evaluation to say your minerals are worth $2000/nma with an offer in hand for $1800/nma for support of the evaluation.
It would also give you a feel for if it’d be worth investing in a retrospective mineral appraisal to establish basis. If the only offers rolling in at the time were for $1/nma it might not be worth it, while $3000/nma would tell you you should jump on it).
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Thanks @tracy_lenz
How would one go about getting a retrospective appraisal? And, just for reference, I inherited my properties in 2016 and have letters addressed to my mom (from the same year) offering up to $2,000 (for purchase) per acre for several properties
Carlos
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I’m not a tax person, but my discussions with my CPA and research I’ve done on the topic is that the IRS can accept a variety of support for the “stepped up” basis but there are rough guidelines on how to establish it (see 4.41.1.3.9.6 in 4.41.1 Oil and Gas Handbook | Internal Revenue Service and 26 CFR § 1.611-2 - Rules applicable to mines, oil and gas wells, and other natural deposits. | CFR | US Law | LII / Legal Information Institute).
I’ve seen different companies online suggest doing it a few different ways: working backwards from today’s value (say, if you have an offer in hand today) using inflation data, having an engineer provide a technical evaluation of the value at the time given the surrounding activity and sales, having a mineral appraiser do something similar to or in addition to an engineer’s report if there’s any income data to include, having a landman provide opinion on the activity in the area at the time of inheritance if there was significant activity, or you could try to DIY-it though data you have on hand (if you already have a lot) like the offers you have now and then to establish the basis (though I haven’t seen much support for these last two methods, I also haven’t specifically seen reports of them NOT working).
It really depends on how much you’d be on the hook from a tax standpoint, if you’re contemplating selling or just curious, and your personal risk tolerance. There’s also nothing saying you can’t try a variety of methods, or variety of opinions using the same method, and pick the most favorable one your CPA thinks will get the job done.
Note that based on Treas. Reg. 1.611–2(f) if the IRS has already approved a value at a certain time, revaluation is not allowed unless you think there was fraud or gross error, and you have approval to do so.
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Executor can choose date of death or 6 months after death for appraisals. Occasionally one date is of considerably more benefit to the estate.
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