Commercial Real Estate Investors Find Increased Tax Benefits in Oil and Gas Investments


Commercial real estate investors are now adding Oil and Gas investments to their portfolios as crowdfunding platforms have begun to open up access to the energy industry in ways never before possible.  Much like commercial real estate, oil and gas investments provide substantial tax incentives for investors along with a wide range of additional benefits.

Commercial Real Estate vs. Oil & Gas – Tax Benefits

It is widely known that commercial real estate investments offer great tax benefits like 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 7 years, similar to straight-line depreciation.

As an example, if an investor 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” (IDCs), 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 would also receive additional tax benefits based on production values and depletion of the reserves.

Intangible drilling costs (IDCs) include items like labor, drilling mud, fuel, wages, 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 have no salvage value and don’t drive away when the hole is completed.

Commercial Real Estate vs. Oil & Gas – Due Diligence and Diversification

Just like commercial real estate, factors like 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 now 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 consideration.

Commercial Real Estate to Oil and Gas – Making the Transition

While individuals with experience in commercial real estate are seeing the obvious necessity to diversify into other asset classes, the barrier to entry for oil and gas investing has previously been too great as substantial cash allocations were required, and easy access to quality deals has been limited to outsiders.  Now, with the advent of crowdfunding technologies like the ground-breaking EnergyFunders platform, commercial real estate investors, as well as investors from all other asset classes, are able to gain access to transparent data on premium, hand selected oil and gas investment opportunities, education on how to select the best projects for their investment goals, and the ability to begin with very small investment amounts to “test the water.”

To learn more the similarities between commercial real estate and oil and gas investments, and the advantages to investing in each, see our article “It Pays to Invest in Oil & Gas.”

If you are ready to reap the many rewards that oil and gas investments can offer, click here to apply for your free EnergyFunders account now.

Commercial Real Estate Investors Find Increased Tax Benefits in Oil and Gas Investments

Disclaimer:  This article is intended for educational purposes only and should not be considered tax or investment advice.  Please consult with your tax professional.

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