23 Apr It Pays to Invest in Oil & Gas
Since 1986, Uncle Sam has given you two options: hand him your tax dollars or instead, invest in a oil and gas project.
Real estate investors understand the necessity for investment diversification, which is why many of them are adding oil and gas to their portfolios. There’s also never been a better time to invest, with many experts advising that buying opportunities for oil and gas today through 2018 are better than 2008 opportunities in the real estate market. With over $1 trillion in large project cancellations, future demand for oil and gas consumption—which grows at a steady rate—are sure to be unmet, raising future prices.
However attractive the economics, generally speaking, it’s hard for an individual investor to gain access to direct oil and gas investments. Yet, advances in crowdfunding technology and regulation, combined with climbing oil and gas prices, now offer the perfect opportunity for savvy real estate investors to branch out. One energy crowdfunding platform is even allowing investors to diversify, starting at $5,000, and has created a structure to pass through unique oil and gas tax benefits to the investor.
These unique tax benefits came to pass when President Regan signed the Tax Reform Act of 1986, which recognized the high risk/high reward nature of oil and gas production. It authorized a binding, one-time election to expense intangible drilling and development costs, which generally permits an immediate write-off of expenditures that would otherwise be capitalized and amortized.
Real estate investors typically are motivated by cash flow, tax benefits and equity building. Not only do direct investments in oil and gas projects fulfill these goals, but it also allows these investors to:
- Take advantage of short-term tax benefits. Investors may see a near-immediate return, whereas it could take decades to get the full tax benefit on real estate investments.
Example: If you invest $100,000 in a property, you get to deduct $3,636 per year. Receiving the full tax benefit would take nearly 30 years. If you invest $100,000 in an oil and gas project with “intangible drilling costs” (IDCs), you can deduct up to 80% of your 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, even before the project produces oil and/or gas. You would also receive additional tax reduction benefits based on production values and depletion of the reserves.
What are intangible drilling costs (IDCs)? This includes items like labor, drilling mud, fuel, wages, structures necessary to perform labor, and supplies, 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.
2. Diversify. In addition to being independent of the stock market, returns from these projects are not dependent on the economy, as is the case for the housing market
3. Less competition and quicker success. When investing in real estate, you compete against large, well-funded rivals and it can take several years to determine if the investment is a success. In contrast, when investing in smaller oil and gas projects like those available by crowdfunding, you are not competing against well-funded interests since they target projects requiring tens of millions in investment capital. Also, within six months, you’ll know whether the investment is a success.
4. Reap the rewards of success. Direct investments in oil and gas projects can pay off big and generate revenue many times over drilling costs if the well is productive. This can result in cash flow from monthly or quarterly distributions for many years, with wells in the United States ranging in life from as little as 5 years to as much as 50 years.