Sale of mineral rights
How do you allocate cost basis for the sale of mineral rights?
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8 Replies
Charlotte256
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03/30/09 12:45pm PDT
"Mineral rights" is a lease which allows someone to look for minerals on or under your
property for a specified period of time and to pay you a little if they find anything.
In manycases the use of the real estate is totally unaffected and the basis of the lease
would be only what it cost to set it up: notary fee, postage or mileage to deliver paperwork.
If the digging or drilling made the property partially or totally unusable for any other purpose,
the basis of the unusable portion would be the basis of the lease.
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PhoebeRoberts
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03/30/09 1:10pm PDT
I don't know what real property law is where you are, Charlotte, but around here, mineral rights are real property interests, and they most certainly have basis. Yes, you can lease the mineral rights (and if it were me, that's how I'd have structured it) to an E&P company, but there's nothing to prevent you from selling them outright, or from selling the surface rights and retaining the mineral rights. (I, for instance, don't own the mineral rights to the land my house is on, even though I own the surface rights.)
Pat, if your guy really sold mineral rights outright, basis is likely FMV of the mineral rights at whichever date is used to determine the basis for the entire property (so purchase date if acquired by purchase from an unrelated party).
If he leased his mineral rights in exchange for cash plus the standard landowner's royalty interest, he's got depletable basis in those rights (in the same dollar amount as above) for cost depletion against the royalties. No Federal depletion on the lease payments, though. He may eventually also have payments for surface damages, if he also owns the surface rights, which reduce basis in the surface rights.
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12/15/11 9:06am PST
Phoebe - I am a CPA and new to the oil and gas industry. I work on a client that initially purchased a mineral rights lease on a large plot of land. They sold 51% to another company (company X) for twice what they paid for the rights to the entire plot of land. The question was raised - Is the gain recognized immediately or over the life of the producing wells? Any thoughts on this? -
12/15/11 9:40am PST
Oh, I have many thoughts. Did they purchase the mineral rights, or lease the rights? Did they purchase all the rights, or did the seller retain a portion? What was the nature of the rights they purchased / leased? Was the property producing when they bought it? Did they sell the rights, or did they carve out an interest? If they carved out an interest, what was the nature of the carved-out interest (working or overriding royalty)?
Those questions raised, cash-basis taxpayer is cash basis.
12/15/11 10:05am PST
Company X purchased the 51% interest. The Seller and Company X will split profits 51% (X), 49% (Seller). They signed a JOA where Company X will do all drilling, etc. and bill 49% to Seller. The property was not producing. There was no drilling started at time of sale. - It is defintely a working interest. They are an accrual basis client. Question is really going to come from a GAAP point of view vs. tax. Any thoughts are helpful.
