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Jon Andrews
Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
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I inherited 2 working interest oil and gas wells when my mother

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I inherited 2 working interest oil and gas wells when my mother died in 2008. They were originally purchased for $18,700.00 in 1996. There were intangible drilling costs of $11,477.00 which were taken in the first year. There was amortization of tangible costs over a 5 year period of $3010.00. There was $4718.00 in percentage depletion. I sold them to the operator for $20.00 in 2009. How do I report this?

The working interest is not considered a passive activity.
Submitted: 4 years ago.
Category: Tax
Expert:  Jon Andrews replied 4 years ago.

You need to determine the "value" of the working interests at the time your mother died. This amount will be your "basis". Then you will report the sale on Form 4797 and it will result in either an ordinary loss or a capital gain depending on what your basis is.

 

The information regarding the original costs and deductions becomes irrelevant due to your mother's death and your subsequent inheritance.

 

jon

Customer: replied 4 years ago.

I had made it that far before I submitted the question, but how do I determine the basis?

Expert:  Jon Andrews replied 4 years ago.

The basis is whatever that value was at the time of her death. Many times we use a multiple of net cash flow for small working interests. For example, if you received $300 per month in run checks and paid $200 per month in lease operating expenses, that would be a net cash flow of $100 per month. Then you can multiply that by 36 - 60 months depending on the specifics of the well. If the production is fairly stable, a longer period would be used. If the production is declining, a shorter period would be used.

 

jon

Customer: replied 4 years ago.

I was under the impression that I would have to reduce the basis by the intangible and tangible drilling costs she wrote off? Is this correct?

 

Percentage depletion deductions were also taken off each year off gross receipts. Are you saying I do not reduce the basis by these? Do I just ignore these depreciation costs?

Expert:  Jon Andrews replied 4 years ago.

HER basis would have been reduced by those items. However, at her death all of that is wiped out and you get a new basis based entirely on the value established as of that date. The only thing that would affect your basis is any depreciation or depletion that you took after you inherited it.

 

jon

Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience: I deal with all levels of tax planning and controversy - from the ordinary to the complex.
Jon Andrews and 3 other Tax Specialists are ready to help you
Customer: replied 4 years ago.

ok that makes sense. How do I determine what my inherited basis might be?

Expert:  Jon Andrews replied 4 years ago.

Many times we use a multiple of net cash flow for small working interests. For example, if you received $300 per month in run checks and paid $200 per month in lease operating expenses, that would be a net cash flow of $100 per month. Then you can multiply that by 36 - 60 months depending on the specifics of the well. If the production is fairly stable, a longer period would be used. If the production is declining, a shorter period would be used.

 

jon

Customer: replied 4 years ago.

One last clarification on form 4797 do I put it on part 2 or part 3 and what type of property is it 1245, 1250, 1254 etc.

 

Thank you

Expert:  Jon Andrews replied 4 years ago.

I would probably list in Part 1. This is not Section 1250 or 1254 property as to your interest. It might be partially Section 1245 if you allocated a portion of the value to "lease and well equipment" and depreciated - which is doubtful. Based on the assumption that you personally have not ever taken deprecation related to this interest, I would use Part 1.

 

jon

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Jon Andrews
Jon Andrews
Tax Professional
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I deal with all levels of tax planning and controversy - from the ordinary to the complex.