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Sold Mineral interest that are not producing. Inherited it

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in the 1970's trying to...
Sold Mineral interest that are not producing. Inherited it in the 1970's trying to figure out what taxes I owe or where I can place the money to defer some of the tax liability.
Submitted: 3 months ago.Category: Tax
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Customer reply replied 3 months ago
What Capital Gains, How much can I gift to my children, is investing in property going to help?
Answered in 1 hour by:
8/14/2017
Tax Professional: Richard, Tax Attorney replied 3 months ago
Richard
Richard, Tax Attorney
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Satisfied Customers: 55,797
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Hi! My name is Richard & I will be helping you today! It will take me a few minutes to type a response to your question. Thanks for your patience!

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Tax Professional: Richard, Tax Attorney replied 3 months ago

Good evening. If they are not producing, did the value of the interests actually increase from the time you inherited them? Has the sale already occurred? Thanks.

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Customer reply replied 3 months ago
We do not know the value from what we understand the value was zero. However over the last two years we have received lease income in lump sums. I've read that you take the lease amounts and multiply those by 2.5 and that determines the value. Not sure how accurate that is. Yes sale has already occurred.
Tax Professional: Richard, Tax Attorney replied 3 months ago

Thanks for responding. I'm in the middle of a complicated transaction for another person and I'm not going to be able to answer your question thoroughly and accurately on a timely basis. Therefore, I am going to opt out to open your question up to all experts so another expert can hopefully timely provide you the information you seek. Please do not respond to this post as it will only slow the process of such an expert picking up your question. Take care.

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Tax Professional: Lev, Tax Advisor replied 3 months ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,136
Experience: Taxes, Immigration, Labor Relations
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Different expert here...

Please allow me to assist.

The mineral rights are considered real property ownership - so - yes - the gain will be taxed as long term capital gain.

The gain will be calculated as (selling price) MINUS (adjusted basis)

When you plan to sell - you would need to determine the FMV - fair market value - that is generally based on comparable sales in your area.

You might want to order an appraisal, but as brief estimation - you may use that evaluation formula

- annual lease amount multiplied by 2.5.

But that might be very different from the value you would get with qualified appraisal.

And there is no guarantee the buyer will pay either amount.

.

Because teh property was inherited - your basis is stepped up basis equals the FMF at the time the decedent passed away.

You would need to find that value - and it is very important in calculation taxable gain.

.

It is possible to defer (not avoid!) the gain by using so-called section 1031 like kind exchange.

In general - mineral rights are considered real property for federal tax purposes and may be eligible for a 1031 exchange.
See here
http://www.ipx1031.com/fb/April2012-InsiderExtra2.htm
Let’s assume that Bob Jones farms or ranches a tract of land. Bob can sell his mineral rights (or royalty interest) without selling the fee to the property, do a 1031 exchange and acquire, as replacement property, additional acreage to farm or ranch or acquire other income producing property which can supplement his income or prepare for his retirement.

.

You may use proceeds any way you want - including gifting all or part to your children - that is not an issues.

However - that will NOT affect your tax liability on realized gain.

Let me know if you need any help.

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Customer reply replied 3 months ago
Thank you for your detailed response. So a couple of questions what is the amount per year you can gift to your children? On a 1031 does it have to be the entire proceeds amount or whatever amount it is you pay taxes on the difference? We are looking to buy investment properties (multiples) and want to figure out where that puts us with capital gains. Also is there a $250k deduction on minerals since it's considered real property like when selling a home? We just want to make sure we set aside proper capital gains amount but also receive the proper deductions when using the proceeds.
Tax Professional: Lev, Tax Advisor replied 3 months ago

So a couple of questions what is the amount per year you can gift to your children?
You may gift ANY amount - there is no limitations.

The gift below $14,000 per person per year is non taxable gift - and will not have any tax consequences.

You may gift up to $14,000 to any number of persons - related to you or not.

On a 1031 does it have to be the entire proceeds amount or whatever amount it is you pay taxes on the difference?

It is possible to have a partial section 1031 exchange.

The primary goal of any 1031 tax deferred exchange should be to buy replacement property of equal or greater value and to use up all the exchange proceeds without getting any cash back. Receiving cash, sometimes called boot, will likely trigger a taxable event for the taxpayer.

Also is there a $250k deduction on minerals since it's considered real property like when selling a home?

There is NO such deduction...

You likely meant capital gain exclusion when teh primary residence is sold.

That exclusion is ONLY applied to primary residence.

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Customer reply replied 3 months ago
is there anything else I can do to defer the capital gains by placing proceeds into annuities, college accounts for grandchildren, investment properties excluding 1031? I am looking for long term deductions as that is my primary goal for selling?
Tax Professional: Lane, JD, CFP, MBA, CRPS replied 3 months ago
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,863
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi. My name's Lane. I am a different expert. Your previous expert opted out of the question.

...

I'm so sorry, but the assumption that the §1031 exchange is always an option here is not quite that simple.

...

The determination of whether a mineral right will be considered like-kind to a fee interest in real property depends on the following:

  • the specific nature of the rights granted under the mineral contract,
  • the duration of those rights, and
  • whether the law of the State in which the mineral interests are located would characterize the mineral rights as an interest in real property rather than an interest in personal property.

...

You need to speak with a real property attorney in YOUR state to make that determination safely, but generally, a “production payment,” for example, is considered personal property because it is a bare right to receive income rather than an ownership interest in the minerals comprising the underlying real property. [See Com. v. Lake Inc, P.G., 356 US 260 (1958)].

...

However, a royalty is considered “like-kind” real property and can be exchanged for any other real property. [Anderson v. Helvering, 309 US 645 (1940)]

...

The fundamental distinction between the two is the term of the interest.

  • With royalties, the royalty continues until the oil or gas deposit is exhausted.
  • A production payment usually terminates when a specified quantity of oil or gas has been produced or a stated amount of proceeds have been received.

...

So it SOUNDS as if you would likely qualify here.

...

But the §1031 IS your only viable possibility for doing something WIth the proceeds that can defer gain completely, into the new property. (The multiples idea works, as long as what you have is considered real property, as in the above).

...

Gifting property does not cause a tax deduction (nor taxable income for the receiver of the gift).

...

529 plans, although can create non-taxable income when used for qualified education expenses, do not create a deduction (some do in some states, for STATE income tax purposes).

...

Contributions to qualified plans (IRA, 401(k), etc.) only reduce taxable EARNED income, not capital gains.

...

Only capital LOSSES offset capital gains such as the one you'd have here IF the §1031 exchange can't be facilitated. SO, if you have other capital assets (stocks, bonds, other property), that can be sold at a loss, now might be the time to sell those if getting out at some point is an objective anyway.

...

The other issue I would look at is whether the value was actually zero when you inherited ... becasue the basis is stepped up to the fair market value as of the date of death (for capital gains purposes). If it can be sold now, there may have been a value to the property (rights) at the time you inherited - very important to talk to a land man, appraiser or other person about the value of the property at that time.

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 3 months ago

Please let me know if you have ANY questions at all, before rating me.

If this has helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

I hope that you’ll rate me based on my accuracy and thoroughness, rather than any good news/bad news content.

That’s the only way JustAnswer.com will compensate me for the work here.

Thanks,

Lane

I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice on three continents since 1986.

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Tax Professional: Lev, Tax Advisor replied 3 months ago

anything else I can do to defer the capital gains by placing proceeds into annuities, college accounts for grandchildren, investment properties excluding 1031? I am looking for long term deductions as that is my primary goal for selling?

Unfortunately - these are not option to defer capital gains...
HOW proceeds are use AFTER the gain is realized will not affect tax liability.
When we plan to defer the gain via section 1031 - the property is EXCHANGED to another similar property - by doing that - we may defer the gain till that replacement property is sold.
As you suggested - annuities, college accounts for grandchildren - are NOT considered similar assets compare to mineral rights - and would not qualify for section 1031 exchange.

While these investment might provide some tax benefits - these will not affect HOW the gain is treated.

On the other hand - your gain will be classified as long term capital gain - taxed at reduced rates - and as a result will result lower tax liability.

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Tax Professional: Lane, JD, CFP, MBA, CRPS replied 3 months ago

My apologies ... when the question came up on the question list, it showed the expert as having opted out. Apparently that was not the case. I'll opt out. As you can see both answers confer

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Tax Professional: Lev, Tax Advisor replied 3 months ago

I appreciate if you take a moment to rate the answer.
Experts are ONLY credited when answers are rated positively.
If you still have any doubts, need clarification - please be sure to ask.
I am here to help you with all Social Security / Tax related issues.

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