Hello, I’m hoping someone can answer a general question. Our father holds a Non Participating Royalty Interest (no surface rights), which is currently producing from two wells. He would like to gift half of it to his children; split up equally among us. I’ve been trying to figure out the tax ramifications of doing that, for him, and/or for us. There are new wells coming online in our section around the first of 2023, and we are looking at trying to do it after the new wells start producing, (to see how they perform) but before the first check. Would the valuation of the new producing wells potentially trigger some kind of gift tax? This is located in Reeves County Texas. Thank you!
This topic has been covered on the forum. You might have to do some hunting with the magnifying glass. It might be to your benefit to wait and pass the NPRI at death since it will get a step up value that might be tax beneficial especially with the new wells coming online. Talk to your CPA and attorney as to the correct steps to take.
Thank you for your reply! I did hunt with the magnifying glass and it’s not easy to find the answer to the specific question of “would the valuation of the new producing wells potentially trigger some kind of gift tax?” Like if we took the steps this year to split it up, (after the new wells are producing so there’s a much better sense of what the value is) would this unrealized revenue trigger a gift tax payable this year? Or does the gift tax kick in on the royalty checks after they add up past $15,000? And can we avoid the gift tax by buying the mineral rights? Not worried about step up basis as my understanding is that only comes into play if we sell our interest. I could be totally wrong about that though! This is all very confusing… 
You are correct about the step up relating to potential capital gains with a future sale.
In order to do the value properly, you might have to do an appraisal of the wells based upon the sale or gift date and the price of oil and gas on that date and the fair market value of the wells. If gifting, the annual gift exclusion is $16,000 for 2022. If selling, might still be a good idea to get an appraisal so that you have an engineer’s opinion. Selling something for $10 that is worth $50,000 might trigger an IRS audit. Still a good idea to contact your CPA as to the best option. If you post the pending wells we can tell you if they are “good” or not.
The current federal estate and gift tax exemption is $12,060,000, which is reduced by any prior taxable gifts. This exemption is in addition to the $16,000.00 per donee annual exclusion. The valuation will be lower if the gift is made before the wells are drilled or producing. You should be so lucky to have a federal gift tax problem now. BTW, on January 1,2026, such lifetime exemption is reduced to $5,000,000, which is indexed for inflation.
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Ok thanks again for your help!
Thank you very much!
Here is another quick question regarding the issue of gifting part of an NPRI. This will be changing half of the ownership from our father to his children, split equally among us. Would an estate attorney be able to handle this? Or does it require an Oil & Gas attorney? I hunted all over the internet for this and it’s amazing how hard it is to find. Thank you!
You will probably need an estate attorney and possibly an evaluation of the value by a petroleum engineer due to the federal estate tax amounts. Also depends upon if before death or after death.
Ok great thank you! One more question (I promise this time), my parents recently received a Reeves county tax appraisal for 2022. Could this possibly work in place of hiring someone to appraise it again?
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