15% Percentage depletion impact on basis for gain or loss calculation

[oreodog]

Does the 15% depletion deduction available to oil and gas royalty owners impact your basis?  I have used this deduction for three years and now can sell my rights but I want to know how to calculate the gain on sale.  It is not clear if I need to reduce my basis to below 0 (I had no basis) to recapture the deletion as ordinary income.

[ee-ea]

Taking depletion does not change your basis.

[PatriciaV]

You cannot reduce your basis in the mineral property below zero. Because percentage depletion is based on income, it is not subject to recapture, even if it exceeds your tax basis in the mineral property.

[oreodog]

That is what I thought but I could not find the answer in IRS information.  Is there anything you can point me to for back up on this?

[ee-ea]

What a hunt.

6.2 last sentence

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Energy-and-Resources/dttl-er-US-oila...

[Rick19744]

@ee-ea 

My reading of your cite is discussing recapture as a result of selling an asset?

[Rick19744]

I'm not sure we have the facts to answer your question:

• What basis are you referring to?
  • Your tax basis in the interest, or
  • Your basis in the underlying assets?
  • A few more facts would be helpful
• The percentage depletion mechanics can get very complicated.  How are you getting the information to determine the smaller of 100% of the taxable income from the property without regard to the depletion deduction or 65% taxable income limit?
• Where are you getting the information related to the gross income to determine the 15% before any limitation?
• What information are you getting in order to arrive your share of the adjusted basis of the property to calculate the depletion deduction; essentially the information to determine bullet number 2.
• This is a tax expense at the individual level (not an entity level expense) without really have an actual expense.
• Unlike cost depletion, percentage depletion is not limited to the depletable base of the property and can be deducted as long as the property generates income.

[ee-ea]

@Rick19744 

6.2  Last sentence

Percentage depletion claimed under the exemption for independent producer and royalty owners that exceeds the tax basis in a property sold is not subject to recapture.

[Rick19744]

Yeah I read that, I am just not clear on exactly what "basis" the OP is referring to?

[PaulaM]

Gain you the sale of your royalty interest is going to be the difference between what you paid for the interest and the sales price. If you inherited the interest as many do, then you basis is the FMV of the interest when you inherited it. 

Valuing your inherited mineral rights can be challenging, if not known at the time of inheritance. Professional mineral appraisers can help with historical values and maybe worthwhile depending on the size of your interest.

@oreodog 

[rjskal]

Incorrect

[rjskal]

% depletion reduces the basis in your mineral rights and is subject to ordinary income recapture upon sale.  Any % depletion in excess of basis is not subject to recapture pursuant to the the exemption for royalty owners.

[rjskal]

% depletion reduces the basis in your mineral rights and is subject to ordinary income recapture upon sale.  Royalty owners have a special exclusion from being taxed on depletion in excess of basis.