Minerals Cost Basis - Did you sell minerals in the past tax year? If so, you will need to get your basis to calculate your gain for IRS tax purposes.
Turret specializes in the calculation of minerals cost basis for oil and gas properties and can help you accurately estimate your basis to calculate your IRS taxable gain.
If you have sold oil and gas minerals in a past tax year, the IRS will tax you on your gain.
You have two options:
Pay tax on the entire sale value, or;
Pay tax on the amount of increase in value from the time you received the minerals.
Pay Tax on the Entire Gain
Paying tax on the entire gain is sometimes appropriate, but only when there is no evidence of value at the time the oil and gas minerals were conveyed. This can occur if minerals were conveyed long before oil and gas production or in an area that was undiscovered when the minerals were conveyed. There are other circumstances to consider, but generally this is only used when the minerals were considered virtually worthless when they were conveyed.
Pay Tax on the Increase in Value
Paying tax on the amount in increase in value is the taxable gain on minerals. A taxable gain is calculated as the sales price minus the value at the time the minerals were conveyed to you or your entity. The value at the time the minerals were conveyed to you is the basis.
Sometimes there is a basis set at the time of conveyance. The most common method to set basis is based on the purchase of minerals. In this method, you have purchased the minerals at some time in the past. Your purchase price is your basis. Another common example of having a basis is when there is an estate valuation for a relative that has bequeathed the minerals to you. Within the estate valuation, there may be a value on the minerals. This value would be used as your basis.
What happens if you have no value for the basis?
If you have no basis value for the minerals when you received them, you will need to consider getting a basis appraisal. A basis appraisal will perform a look-back to estimate the value of the minerals you sold at the time they were conveyed to you.
The way we perform a basis appraisal is based on the date that you received the minerals and the development status of the minerals.
Generally, if the minerals were conveyed in the recent past information is better, more available, and verifiable. Furthermore, minerals typically have a higher value in the recent past which makes it more worthwhile to perform a mineral basis appraisal because a higher basis will result in a lower taxable gain.
If the minerals were conveyed more than 20 or so years ago, the information is less available and more difficult to verify. Another consideration of setting the basis is the value of minerals is generally lower the further back in time one goes, so there are diminishing returns the farther back one searches. There is a point at which it makes more sense to pay tax on 100% of the gain rather than pay a consultant to perform a basis valuation. Before engaging a cost basis appraisal, a small amount of consulting work should be performed to estimate if the basis appraisal will be financially worthwhile for you.
Please call Turrett and we will be glad to help you evaluate your options for your mineral basis appraisal.