Cost basis of inherited Mineral rights

[RR Reed]

Our client recently sold mineral rights inherited in 1970s. We might have some information on its value through the estate tax valuation made originally at the time of inheritance, which is quite low.  I am reading there is something called a 36-48 month rule used in valuing mineral rights, based on the royalty income it has received (I have information on the historical incomes received). Is any one familiar with this rule? Trying to see if this method might give us a higher basis.

[rbynaker]

What about depletion?

@PhoebeRoberts is our forum guru on this stuff.

[sjrcpa]

If it was valued for inheritance tax purposes I'm not sure you can use a different value now when you sell it.

[qbteachmt · Accepted solution]

The step-up method is only used if that was just recently inherited. If you have a valuation per the estate transfer, you use that. You are lucky to have that; we could not get any valuation, even though we hired a firm to do it, in 2009.

[RR Reed]

Thank you all for your input. I will stick with estate valuation in that case.

[PhoebeRoberts]

It's worse than you think! Your client's adjusted basis is almost certainly zero - the original 706 valuation less depletion over the years. Your client has ordinary income to the extent of that original 706 valuation, and capital gain for the excess. A low original basis is what you want to be hoping for.

[sjrcpa]

"If you have a valuation per the estate transfer, you use that."

The estate valuation for inheritance tax was the step up (or step down).