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Margaret CPA in OH

Gas, oil rights sold - rents on 1099

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A client has sold gas and oil/ mineral rights.  The 1099 MISC shows the proceeds in Box 1, Rents.  I called to see about this but was told that was where such things were listed.  This is completely new to me.  I've always listed the royalties on Sch. E but somehow showing rents with no real estate info seems odd.  It seems it should be Sch. D.  There is no recoverable record of basis.

Related, is the attorney fee then deductible from this?  Does the attorney require a Form 1099 MISC as it was over $600?  This wasn't the client's trade or business, mind you. Seems great-great (maybe even more greats back to the 1800's) grandpappy in PA invested in this and she somehow inherited 1.38888889% share.  It's the last possible probatable item and she wants to be rid of it.

Making me a little crazy here and so early in the season!

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Bump - with 38 views I don't seem to be the only one with questions. Surely some of you good folks have had experience with oil and gas interests.  Please offer hints, anyway, if not actual chapter and verse.  Anything would be much appreciated.

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Well, you certainly deserve an answer, but the only thing I know about gas & oil is it's cheapest at the Shell station here.  For your purposes, and this is gonna sound kind of corny, but some of the most clearly and plainly stated answers to your kind of questions are posted on TurboTax (they aren't hiring EAs and CPAs for nothing).  I just typed this into Bing and Google ("TurboTax - How do you report the sale of mineral rights on your income tax?") and they say it's section 1231 capital gains property plus various other tidbits about valuation.  Granted, these are not IRC case cites, but sometimes they can put you on the right path (I tried the U.S. Master Tax Guide that ATX sent me and couldn't find a thing). 

Good luck.

 

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I believe the SALE of mineral rights is treated as the sale of Section 1231 property. So I think they get capital gain treatment using Form 4797. But I haven't had any actual experience with it. The instructions to 4797 indicated that it is used for the sale of oil/gas properties.

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Thanks so much!  I honestly didn't try the search engines thinking a: this would be a bit esoteric and b: surely someone of this esteemed collection of brains would know the answer.  You've given me a start anyway!

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Well, scottmcfly. that was my thought as well but the 1099 shows the proceeds at Rent and I have no clear understanding of how to get that figure onto 4797 when the IRS computers are likely looking for a match to Box 1 Rent on what? Sch. E?  Of coiurse I have no basis but the amount isn't so great that 0 wouldn't work.

I did put in a call to a representative of the issuer of the royalty checks because I also don't understand why she kept receiving checks following the 'sale' but thought maybe they were distributions for prior income - or something.  If I ever have another client with this stuff, I think I will suggest they keep moving on!  I'm getting too old and confused to learn much new stuff.

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1 hour ago, Margaret CPA in OH said:

Bump - with 38 views I don't seem to be the only one with questions

To be clear on the # of views, that tally includes "guests" that visit the site in search of answers that are unable to reply.  Also, one person looking at the post multiple times will add to the count as well. For example, if I look at the post once a day for a week or every time others post a response, that would add 7 views to the count, so your post may have only had a handful of members look at the post a few times each simply out of curiosity or to learn something new.

Sorry for the hijack but wanted to explain that it might not be members purposely not answering or ignoring your question.

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Judy, thanks for the explanation of views.  I honestly did not think that folks were purposely not answering or ignoring the question.  It was probably more like seeing what new strange situation arose, was it like anything in their experience, just maybe they might know the answer or provide a suggestion - which is what finally happened!  And I am so grateful for that and for all on this board, even guests.

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On ‎1‎/‎29‎/‎2019 at 10:14 AM, Margaret CPA in OH said:

It seems it should be Sch. D.  There is no recoverable record of basis.

grandpappy in PA invested in this and she somehow inherited 1.38888889% share. 

Related, is the attorney fee then deductible from this? 

Does the attorney require a Form 1099 MISC as it was over $600?  

OK, I will take a shot at this, but just as a mental exercise.

First, I don't think you have a clear picture from your client on what is going on.  What exactly did grandpappy invest in (partnership, LLC, JV?) because he only got a piece of it, and someone is doing the accounting for that entity that is sending your client the 1099.

Second, I think the 1099 may be correct, because you say the TP kept getting royalty checks.     If the TP owned the rights in 2018, and the entity rented out the land for exploration of the minerals/oil, it is possible that the TP has in fact received the pro-rata portion of the rents.   That would go on Schedule E as royalties.

Third, you need to find the date of the sale of the interest in the rights.   The TP has a basis in the interest, and it is the FMV on the date of death.   So when you figure out what the investment is, and what type of entity is holding the actual property, you should be able to contact them and get a valuation for the portion of the interest your client holds.   Then you should be able to see what your client sold it for, and put that transaction on the 4797.

Just my quick thoughts, which may be all screwed up.

Tom
Modesto, CA

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Thanks so much, Tom, for your insights.  As it happens, I am POA for this client now in a memory care unit.  I've been trying to get her assets out of possible probate.  This is the last thing and I thought it was done.  In January I succeeded in transferring "ALL of grantor's one-seventy second interest in the oil, gas, and other hydrocarbons...as described as follows...BEING a part of the same oil and gas interest that was granted and conveyed in Deed Book...(to her father and other family members, only names of persons, no entities) in 1946..."  and only describes very specific tracts of land.

For 2016 (just when she was beginning to lose it) and 2017, her Forms 1099 stated only royalties, nothing about rents.  The dollar value of the purchase of the above is the amount in Box 1 Rent.

The date of the sale is the date I signed it, January 25, 2018.  The date she inherited this was her father's date of death, intestate, in 1997.  There is an affidavit of heirship dating back to 1940, her grandfather is named there.  I called the county courthouse but there is no record of value for basis purposes.

I am happy to use 0 as the basis as her tax won't change.  My biggest problem is how to show this jumping from Sch. E, Rents, to 4797/Sch. D, as a capital asset.  Guess I can just plug in the numbers and explain when/if the query arrives. 

Sigh, and it is only beginning...

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The few times I've had clients sell their interests, they received a K-1 with the usual items for the portion of the year they were owners PLUS a spreadsheet with notes detailing what amounts are capital gains and what amounts need to go to 4797 and other forms, or maybe it's adjustments to those forms, but you get the idea, $ amounts and where to put them. Also, a chart with buy and sell dates. And, contact information.

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Thanks, Lion.  I suspect that there will not be a K-1 as to date only Forms 1099-MISC have been received.  I believe this and the predecessor ownership was on an individual basis, not in an entity, as evidenced by the Heirship Deed copy I have.  There is no mention anywhere of an entity, only names of individuals. And I've already received the 1099 with the proceeds listed under Rent hence my original question

I sort of think it was originally land owned by great-great someone or other and the rights to the gas and oil were sold to this Range Resources but not the actually property.  I thought I was selling the actual ownership in the property - that 1/72 share - and it would be deeded over to the company that has been sending the royalty checks.  I'm hoping they call me back.  The rep with whom I spoke did not seem to know much but took down my questions promising to get back to me.  Otherwise, I will muddle through.  I just really want to be completely done with this to avoid probate. All her other assets are to go to charities if she doesn't use them up for long term care first.

To quote another poster: "Oh Lord, why me?"

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On 1/31/2019 at 1:29 PM, Margaret CPA in OH said:

.  My biggest problem is how to show this jumping from Sch. E, Rents, to 4797/Sch. D, as a capital asset.  Guess I can just plug in the numbers and explain when/if the query arrives. 

 

This is the way I would handle it.  1. Report the Rent as income on Sch E.  2. Then under Expenses, enter same amount as Offset to form 4797.  After that you could provide an explanation on form 8275.   However, if reporting the sale as Rent, is , on the 1099, std op procedure, 8275 shouldn't be needed.

The IRM provides this on oil/gas leasing  & sale.   https://www.irs.gov/irm/part4/irm_04-041-001#idm139661998901968

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