Tax on the sale of leases

Good Morning,

May be selling the oil/gas rights to a parcel of land in Clarion County. Have some others we are holding on to for an eventual lease. However, for now, my family members and I could benefit from some income. Does anyone know how a sale of the rights is taxed. To the best of my knowledge, there have not been appraisals conducted. The lease has been in our family for 40+ years and have no idea of the purchase price paid. My uneducated thought is by selling, we may be making some money, but we are not getting asking price and when you consider the potential loss of revenue through a lease and royalties, there may well be a loss.

Any experience with this? Any recommendations?

Appreciate it!

Bill

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Permalink Reply by Dexter Green on May 21, 2015 at 5:52am

Proceeds from the sale of mineral rights are taxed as a capital gain.  If you have owned the rights for more than a year then they are long term cap gains.  The rate you pay is dependent on your current ordinary income tax bracket.  If you have ordinary income from $37,450-$413,200 your cap gains rate is 15%.  If you are married, and filing jointly, the 15% cap gains rate starts at $74,900 in ordinary income.  If you make less than $74,900 then the cap gains rate is 0%.  You're still subject to any state and local income taxes.

OK, so that's the elementary school version.  It can become far more complicated, depending on any number of factors.  You could argue that mineral rights are "real property", which would make the sale of them a real estate transaction, which has a rate altogether different than dividends and qualified investments.  The rate is also based on the profit made from the sale.  Example: you bought 30 acres of land for $5,000/ac.  The going rate for land in the area, without mineral rights, was $2,000/ac.  You could argue that you paid a $3,000/ac premium for the mineral rights themselves.  Thus when you sold the rights you'd only pay tax on the amount over and above the investment cost of $3,000/ac.  However, if you just own the land and there has never been an implied value to the mineral rights then your cost is $0, thus making you liable for taxes on the entire sale price.  

Like I said, it can be complicated.  Call a competent accountant and walk him/her through what you're doing and get their advice on the matter.  They can show you how to get in a 1031 exchange and make income while not paying any upfront taxes.  They can also keep you from having a giant IRS headache for the next decade.  It'll be worth whatever they charge you to get sound advice.

Permalink Reply by William P.Milchak on May 21, 2015 at 6:10am

Thank you Dexter. Wow....will take your advice and speak with our tax accountant. My guess is the 15% capital gains tax will prevail, but this is an uneducated guess. Far more angles than I anticipated. I appreciate you taking the time to respond to me and so quickly.

Permalink Reply by Janice L. Hancharick on May 22, 2015 at 2:42pm

That was an excellent quick overview of what selling rights can bring ... good and bad.  It's better to know than get slammed by the IRS by something not understood.  A fellow who deals w/this daily w/buyers and sellers is wsmith@cx-energy.com.  Combined w/an accountant's knowledge you and family members should feel much safer about the decision to have @ least a partial sale of OGMs.

Permalink Reply by Nancy LeNau on May 23, 2015 at 3:17pm

So LOVE.... Dexter Greens Advice !!!!   Wonderful !!!!

Permalink Reply by Philip Thackray on May 23, 2015 at 2:32am

In addition to what Dexter said-

Just for reference if you lease your land:

1) The upfront bonus money is ordinary income

2) The royalty is ordinary income

3) The 15% depletion allowance, calculated on the gross income (before deductions) from production (not bonus money) can be deducted from your net income for tax purposes.

4) There is a limit to the amount of percentage depletion deductible see here: http://www.mineralweb.com/owners-guide/leased-and-producing/royalty...

Phil

Permalink Reply by Richard Lee on May 26, 2015 at 3:49am

I have done tax preparation for many years. You will owe capital gains tax on the difference between the sale price and your basis. The basis is what was originally paid for the property. If the property was  inherited, it is the fair market value on the date of death. If the basis cannot be estimated, the IRS says use zero, When I inherited the mineral rights when my father died in 1983, the mineral rights were valued at $5 an acre. This was before fracking.

Permalink Reply by Ruth Krull on May 26, 2015 at 4:02am

Sorry for tagging along on this question as I haven't posted on here for a long time, but have been reading.  I inherited royalties on two wells in 2002 when my aunt passed away.  In 2011, they were sold and capped so I stopped receiving a check. Received a call in 2013 to sell these mineral rights (also found had some other mineral rights in another township).  I was left the royalties but my 2 brothers and I were left the rest, which includes mineral rights.  The final sale of these rights was Jan. 2014.  (This property goes back to our uncle's parents in the late 1800's and early 1900's) We have had a very hard time getting info on what these rights would have been worth in 2002 for our taxes.  No one seems to have any idea.  We don't live in PA (they are located in Greene Co.) and have spoken to many attorneys/accountants and can't seem to get anywhere.  We filed extensions on our Fed taxes to continue this search.  We know we have to pay capital gains, however, we don't have a figure to start with for 2002.  Any ideas as to how we can get some kind of ball park figure to file these taxes?

Any help would be much appreciated.  Thanks much!

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