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We sold a house with property in 2008 but reserved the mineral

rights on the deed. After...
We sold a house with property in 2008 but reserved the mineral rights on the deed. After the sale, the buyers asserted the rights should have been theirs and made a claim to their title company. The title company may offer us a sum of money in exchange for our agreement to reform the deed.
Questions: 1) Will any money paid to us by the title company be taxable? 2) If yes, is there a way to avoid this tax? e.g. Can we treat this as if the sales price of the house were increased (less than $500,000) and therefore (for a married couple) not exceed the 2008 threshold for capital gains tax?
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Answered in 2 hours by:
9/2/2013
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,160
Experience: Taxes, Immigration, Labor Relations
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Hi and welcome to Just Answer!
The issue is that the mineral rights are classified as partial ownership related to the ownership of the land. Generally if the mineral rights are sold separately - the capital gain is determined the same way as for any other asset as (selling price) MINUS (basis).
The basis for the mineral rights is calculated as a prorated basis of the land.

Now - back to your questions.

1) Will any money paid to us by the title company be taxable?

While that should be confirmed with the title company - most likely - the settlement amount will be reported on form 1099MISC - and will be considered as taxable.
There will be the difference in reporting...

If the sale transaction of the land (or the mineral rights related to that land) occurred more than two years after the sale of the main home - the gain realized on that sale may not be excluded. That would be a long term capital gain - taxable at reduced rate.

 

2) If yes, is there a way to avoid this tax? e.g. Can we treat this as if the sales price of the house were increased (less than $500,000) and therefore (for a married couple) not exceed the 2008 threshold for capital gains tax?
That would be possible. However the IRS might disagree with your treatment - and you need to be prepared. In particular - you need to be able to proof that original contract was amended and that payment is made to the seller. In this case the last payment will be an installment payment - and should be divided into principal and interest. While the principal potentially might be excluded - the interest would be taxable.

 

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Customer reply replied 4 years ago

If we did, in fact, amend the sales contract, would that satisfy the IRS? Payment would be to us, the sellers, and since this did not involve a loan I don't see where principal and interest would be a factor (am I missing something?).

I may not guarantee that any specific explanation or documents would satisfy the IRS in case of the audit.

The main issue would be if that is the same sale transaction or a separate sale transaction.

If the IRS would audit you and will question your position - the main issue would be if that was ONE sale transaction or TWO separate transactions.

If the title company will issue the form 1099 reporting the settlement amount - the IRS will likely tend to treat your situation as two separate sale transactions.

 

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Customer reply replied 4 years ago

If the sales price had been higher back in 2008, there would not have been a 1099 and we would have received additional funds from the buyers at closing; reflected on the HUD form. Is there be any way to keep the title company from issuing a 1099?

Generally - the title company would be required to issue the form 1099 reporting payment if the payment is made by the title company.
The form was not issued back in 2008 because that was your primary residence.
As th etitle company will likely treat that payment as a separate sale or as a separate settlement - I woudl expect them to issue the form.
If you pay to the buyer directly - most likely - there would not be any reporting form.
Otherwise - you may verify if the title company will issue the form - but you may not force them not to issue.
Lev
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