Commercial Real Estate vs. Oil and Gas Investing
Commercial real estate investors are adding oil and gas investments to their portfolios as crowdfunding platforms open up new possibilities. Much like commercial real estate, oil and gas investments provide substantial tax incentives for investors.
Oil and Gas Tax Benefits
It is widely known that commercial real estate investments offer tax benefits such as taking deductions for depreciation over the course of 25 years. However, most people are unaware of the substantial benefits that oil and gas investments provide.
The IRS offers substantial tax benefits to investors via the intangible drilling cost (IDC) deduction in which an investor can deduct up to 80% of their investment amount during the year of the investment. The remaining 20% can be depreciated over seven years, similar to straight-line depreciation.
For example, if investors were to allocate $100,000 to a commercial real estate investment, they would be able to deduct $3,636 per year. Receiving the full tax benefit would take nearly 30 years. On the other hand, if they were to invest $100,000 in an oil and gas project with intangible drilling costs, they could deduct up to 80% of the investment, or about $80,000 in the first year. At a 35% or 39.6% tax bracket, this is equivalent to a 28% – 32% return in year one, regardless of how well the project performs. They also receive additional tax benefits based on production values and depletion of the reserves.
Intangible drilling costs include items such as labor, drilling mud, fuel, wages and structures necessary to perform labor and supplies. These projected costs are incurred whether it is performed on the well, to drill the well or on the ground surrounding the well. Think of it as all the costs incurred that you can’t reuse when the hole is completed.
Due Diligence and Diversification
Just like commercial real estate, factors such as site location, quality and cash flow potential are all important considerations for oil and gas investments. Commercial real estate can offer a fairly cut and dry approach to risk assessment in the form of tax returns, rent rolls, inspection reports and market assessments.
Modern technology has made it possible to more accurately predict the potential and future performance of oil and gas sites, similar to the level of due diligence and risk assessment expected in any commercial real estate investment.
Making the Transition
While individuals with experience in commercial real estate see the need to diversify into other asset classes, the financial barrier to entry for oil and gas investing was too high, and easy access to quality deals was limited.
Now, with the advent of crowdfunding technologies like the ground-breaking EnergyFunders platform, commercial real estate investors, as well as other investors, have access to transparent data on hand-selected oil and gas investment opportunities. They also have education on how to select the best projects for their investment goals and the ability to begin with small investment amounts to test the water.