After my father passed away my siblings and I formed an LLC together with our mother in 2014 in order to simplify various issues and help with her taxes . These may have been her own mineral ownings apart from my father’s, because his have been divided to us separately, so these cannot yet be categorized as inherited because she is still living. We recently sold them for a very attractive amount and are trying to figure out our tax implications with some very perplexing factors:
We were told that if the LLC is dissolved our cash assets from the mineral sale would be taxed at long term capital gains rates and the basis would be the oil price at LLC formation. On the K-1 forms we have received from the LLC accountant for royalties the original cost basis is listed as “0” because the value was not determined at the time. The LLC formation papers state that our mother “sold” her mineral rights to the LLC (of which she is of course a member) for $1. Later she gifted her higher percentage so that we all have 20% now instead of the original 10%. I have been diligently reading on this site and believe we must hire a professional who can determine the value of our minerals in 2014 for a cost basis. Or, would we possibly have to count that as $1 from the LLC deed, or even 0 from the first K-1?
Thanks for any help on this complicated issue!
If this was inherited property then there should be a “stepped up basis” meaning that the recipients basis for computing capital gains equals the value at the time of inheritance. See 26 U.S. Code § 1014 - Basis of property acquired from a decedent. You might want to revisit the CPA or find another. I don’t believe the basis should be zero.
Also if the property was a gift from your mother, then you should acquire her basis. See 26 U.S. Code § 1015 - Basis of property acquired by gifts.
See a CPA,
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Thank you so much for your answer, Richard, which is very helpful. The minerals we have sold were gifted by our mother via a trust to the LLC in 2013. She is still living (104 now!), so it doesn’t qualify as inheritance. Indeed, figuring her basis is the challenge we are facing, when and how to figure it out. The links you gave me are helpful, though it’s hard to understand the legalise! Code § 1015 is probably the answer… We will need an expert to guide us through this process of establishing the basis, I can see.
I have another question based on the answers we have gotten so far. We think now that we will have to go back to our mother’s cost for the mineral rights, which came with land she bought during the 70’s and later sold, retaining the mineral rights. It is in the DJ Basin in Weld County, CO. There has been continuous production during most of the time since then. Right now we don’t have an accurate cost basis to offset the present capital gains amount we will owe. Does anyone have an idea of what the value of about 150 net mineral acres might have been at that time? The estimated cost for a mineral appraiser is $7,000 to $10,000. So we are trying to determine whether it would be worth paying for the appraisal.
If you have an accurate list of the acreage, date bought and the wells involved, then it may not cost that much for an appraisal. Suggest you talk to an accountant and get their take on how to approach the value. There were some fairly standard ways of calculating vertical wells based on performance back then. I have heard four years of oil production and seven years of gas. The accountant should be able to point you in the right direction.
Thank you so much for taking time to answer and for your advice! We are getting closer to the answers we need! We have the accurate list of all but the date bought, and can probably find that information. This forum has been very helpful on this confusing journey!