Gas/Oil Lease Income

[Ray in Ohio]

I got a call from a client who owns 100+ acres of vacant land. (not his residence)He has an offer of $1300.00 per acre for a 5 year lease for oil & gas drilling rights. His question to me was: Is the whole amount ($130,000.00+) going to be taxable in tax year 2010 when he receives the total amount, or will it be pro-rated over the 5 year period. Off the top of my head I told him I believe it would all be taxable in the year received. I have spend a couple hours trying to find an answer to this situation on the IRS website with no success. If anyone has any idea or oponion in this, I would greatly appreciate and help.

Thanks you!!

Ray

[taxxcpa]

I got a call from a client who owns 100+ acres of vacant land. (not his residence)He has an offer of $1300.00 per acre for a 5 year lease for oil & gas drilling rights. His question to me was: Is the whole amount ($130,000.00+) going to be taxable in tax year 2010 when he receives the total amount, or will it be pro-rated over the 5 year period. Off the top of my head I told him I believe it would all be taxable in the year received. I have spend a couple hours trying to find an answer to this situation on the IRS website with no success. If anyone has any idea or oponion in this, I would greatly appreciate and help.

Thanks you!!

Rayoo

I think it would be like rent paid in advance which is taxable when received. The following is from The Tax Book:

Rental Income

Rental income includes any payment received for the use or occupancy

of property. In addition to normal rent payments, the

following items are reported as rental income:

Types of Rental Income Description

Advance rent Any amount received prior to the period

that the payment covers.

Payment for canceling a lease

Any amount paid by a tenant to cancel

[AnnieR]

I don't have the answer, but if this is in reference to "fracking" here in eastern Ohio, Pa, WVa I'm certainly interested in what everyone has to say about it.

AnnieR

[taxxcpa]

I don't have the answer, but if this is in reference to "fracking" here in eastern Ohio, Pa, WVa I'm certainly interested in what everyone has to say about it.

AnnieR

Almost any payment you receive is taxable unless either a working interest payment, a royalty interest payment or some other kind of payment based on production such as a 'net profits interest'. Payments for damages to your property are considered as a reduction of your basis in the property.

[Edward]

Ray. I don't believe there is any way to allocate the 130,000. If your client gets a 1099-Misc for the total amount for 2010 tax year then its taxable on the 2010 tax return. When IRS does the matching of 1099's, they will be looking for the 130,000 on your clients tax return. Thats the way it works for the "Cash basis taxpayer". Could your client get the offer to permit annual payments rather than a lump sum? Anyone have an additional opinion on this?

[Ray in Ohio]

Thanks for the responses. I agree that it appears that the whole amount would be taxable in the year the payment is received. It helps to know that others agree with my "hunch".

Ray