1099-S Received for the Sale of Mineral Rights Not Related to the Sale of Land

[davidstamm]

I inherited mineral rights in WV in 2020 under property my great grandfather sold in 1919.  I have the bill of sale for the land which stated that he retained a portion of the mineral rights.  I sold these rights in 2023.  The purchasing company sent me a 1099-S for the sale.  I hired an attorney to give me a cost basis for these mineral rights so I could determine my capital gain.  I've read the instruction for Form 1099-S (1/2022) and have found that there is a filing exception for mineral right sales that are not related to the sale or exchange of reportable real estate. 

Exceptions

"No reporting is required for the sale or exchange of an interest in the following types of property, provided the sale is not related to the sale or exchange of reportable real estate.

• An interest in surface or subsurface natural resources (for example, water, ores, or other natural deposits) or crops, whether or not such natural resources or crops are severed from the land. For this purpose, the terms "natural resources" and "crops" do not include standing timber."

WV taxes were withheld at the time of sale and I've just completed my non-resident WV tax forms.

Am I reading this Instruction correctly or do I owe federal taxes on the sale of these mineral rights?

Thanks very much!

David Stamm

[PatriciaV]

Yes, you may still owe federal taxes on the sale of mineral rights. The buyer was not required to send you Form 1099, but many still do. The IRS doesn't require 1099-S or 1099-MISC for the sale of mineral rights. But you are still required to report the proceeds on your tax return. Enter this as the sale of an investment (Schedule D).

Here is how to report sale of inherited mineral rights:

1. Open or continue your return (you can choose the Search box and type 'sale of second home' then use the Jump to link to enter your inherited sale) or follow the menu.
2. Under Wages & Income scroll to Stocks, Cryptocurrency, Mutual Funds, Bonds, Other (1099-B)
3. Answer Yes on the Did you sell any stocks, mutual funds, bonds, or other investments in 20XX? screen
   • If you land on the Your investment sales summary screen, select Add More Sales
4. On the OK, let's start with one investment type screen, select Other, then Continue.
5. On the Tell us more about this sale screen, enter the name of the person or institution that sent you the 1099.
6. On the next screen, select Other (choose this also for inherited homes) then select I inherited it under How did you receive this investment?
7. Enter the other information as needed. The date acquired is not necessary for the sale of inherited property because it is always considered long-term.
8. Continue back to the investment sales summary.

If you see "Needs Review" or get a message from SmartCheck, simply complete the requested information in fields that are highlighted.

[davidstamm]

Patricia V.,  Thanks for your response.  I’m still concerned about the last item listed under “Exceptions” for the 1099-S that says:

No reporting is required for the sale or exchange of an interest in the following types of property, provided the sale is not related to the sale or exchange of reportable real estate.

• An interest in surface or subsurface natural resources (for example, water, ores, or other natural deposits) or crops, whether or not such natural resources or crops are severed from the land. For this purpose, the terms "natural resources" and "crops" do not include standing timber.

Why would the IRS include a caveat like this if these mineral right interests were taxable?  My great grandfather sold this property in 1919, but retained a portion of the mineral rights.  So this sale was not related to the sale of property.  Reporting this like the sale of a second home or stock is like saying that it is real property.  Rights are rights, nothing more.  They become taxable assets once they reach the surface.  That’s why mineral right owners lease land containing minerals and pay taxes on their portion of these minerals once they are mined.  Please give me additional insight that I don’ currently have.  Thanks!

David

[PatriciaV]

Per Pub 525 Sale of property interest: "If you sell your complete interest in oil, gas, or mineral rights, the amount you receive is considered payment for the sale of section 1231 property, not royalty income. Under certain circumstances, the sale is subject to capital gain or loss treatment as explained in the Instructions for Schedule D (Form 1040). For more information on selling section 1231 property, see chapter 3 of Pub. 544."

See also:

• Tax Implications of Selling Mineral Rights
• Step-up Basis for Inherited Mineral Rights