Mineral Rights Inheritance & Step-Up In Basis

October 22, 2018

Oil and gas mineral rights are an asset. The value of an asset will change over time due to a number of different factors. Well production, commodity price, development activity and increased accessibility to the minerals through new technology, will impact oil and gas mineral value. When an asset changes hands, a capital gains tax charged on any value increase between purchase and sale price. However, a Step-Up In Basis can be applied to inherited mineral rights so that tax can be avoided or at least minimized.

What is a Step-Up In Basis for Inherited Mineral Rights?

A Step-Up In Basis refers to the readjustment of the value of an asset to minimize capital gains tax. When mineral rights are inherited the value basis is not what the previous owner bought the land for. It is the value at the time of the inheritance. The value of the inherited mineral rights should be reassessed at the time of inheritance to reflect current market value. This new value would be the basis for calculating capital gains.

Inherited Mineral Rights Step-Up In Basis Example

Here is an example.

Bill left 5,000 acres of mineral rights to his granddaughter, Mary. Bill had bought those mineral rights in 1960 for $2,000. A 2018 valuation of the oil and gas minerals determined the Suggested Market Value to be $553,745. Mary sold the mineral rights a few months later for $953,745. Mary only had to pay tax on $400,000; the difference between $553,745 and $953,745.

Example of Suggested Market Value for Inherited Mineral Rights Step-Up In Basis

How to get a Step-Up In Basis on Inherited Mineral Rights

It is important that at the time of inheritance the new owner obtain a current valuation the asset.

Mineral rights value can change dramatically between distances so basing value off of nearby sales is not good practice. Refer to this blog to learn more. Using an offer letter you many have received to purchase the minerals is also not a very good indicator of what the minerals are actually worth. Ideally, mineral owners should obtain an independent technical study of their mineral acreage. Although, historically these methods have been fairly expensive, LandGate offers a more affordable service. LandGate has digitized the valuation workflow therefore is able to provide these type of valuations faster with more accuracy at a fraction of the cost.

For more Mineral Owner resources, check out past articles in the Mineral Owner section on our blog.