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Lev
Lev, Tax Advisor
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Experience:  Taxes, Immigration, Labor Relations
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Hi there- In 2011, my sister & I sold the surface rights

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Hi there-
In 2011, my sister & I sold the surface rights to some land in Oklahoma. Now for 2012, we will be selling the mineral rights for about twice the price recieved for the surface rights. This land was acquired via inheritance in 1990. I checked with the county to find the valuation of the land to use as cost basis, but was only given a lump-sum appraisal for that time. Question is, how to determine the division fo the valuation to apply to these 2 years of sales for capital gains. I believe the minerals at the time of acquisition were not worth much, but now they are worth much more. Would it be wise (in case of audit) to use a"good faith" judgement and pehaps apply more valuation towards the minerals? I curently have a fairly high tax rate and certainly need the 15% rate for both. Your opinion would be greatly valued.......Thanking you in advance
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

Hi and welcome to Just Answer!

Both selling transactions - the surface rights and the mineral rights - are treated as he sale of partial rights related to the ownership - so it is the sale of a real property - and you are correct - the gain is treated as long term capital gain and is taxed at reduced rate - not more than 15%.

Your taxable gain = (selling price) - (basis).

However - if there is a large long term capital gain - you need to verify if you will be subject of AMT tax.

The basis of an inherited property is a fair market value of that property at the time the decedent died.

As you need to prorate that basis between the surface rights and the mineral rights - if selling prices are about the same - I would prorate the basis in the same proportion.

 

If you have a ground for a different proration - you may prorate the basis differently. As long as the proration would be reasonable - it will be accepted by the IRS. You may also hire an appraiser to do historical appraisal - but might want to consider the service cost.

 

The sale transaction is reported on form 8949 - Part II - http://www.irs.gov/pub/irs-dft/f8949--dft.pdf - if the property was held more than a year - box "C" in the header should be checked.
Then - amounts will be transfered to schedule D - http://www.irs.gov/pub/irs-pdf/f1040sd.pdf
Part II, line 10 - and you should have the taxable gain in column (h).

 

Let me know if you need any clarification this matter or have other tax related issues.

Customer: replied 2 years ago.
re:

The basis of an inherited property is a fair market value of that property at the time the decedent died.

As you need to prorate that basis between the surface rights and the mineral rights - if selling prices are about the same - I would prorate the basis in the same proportion

 

The selling price of the mineral rights is about twice the surface rights, but at the time of the inheritance, the minerals were usually considerable less than the surface .

So I'm still rather stumped....without separate appraisals at the time of acquisition, are you suggesting a "good-faith" estimate ?

Customer: replied 2 years ago.
re:

The basis of an inherited property is a fair market value of that property at the time the decedent died.

As you need to prorate that basis between the surface rights and the mineral rights - if selling prices are about the same - I would prorate the basis in the same proportion

 

The selling price of the mineral rights is about twice the surface rights, but at the time of the inheritance, the minerals were usually considerable less than the surface .

So I'm still rather stumped....without separate appraisals at the time of acquisition, are you suggesting a "good-faith" estimate ?

Expert:  Lev replied 2 years ago.
Because you are selling the mineral rights for about twice the price received for the surface rights - that may be used as a reason for proration 2/3 to the mineral rights and 1/3 to the surface rights.
You are not required to perform historical appraisals and a "good-faith" estimate will be perfectly acceptable if it is reasonable.
For instance - if in your area the mineral rights are usually selling for about three times the price for the surface rights - that may used as a ground for the "good-faith" estimate - and will be considered as reasonable.
You are not required to use any specific method for proration as long as the method you are using is reasonable.
Please be aware that you do not need to disclose the method of proration on your tax return and do not need to provide any supporting documents to the IRS unless you are audited.
Let me know if you need any help.
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22389
Experience: Taxes, Immigration, Labor Relations
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