Commercial Real Estate vs. Oil Investing
Commercial real estate investors are adding oil investing to their portfolios as crowdfunding platforms open up new possibilities. Much like commercial real estate, oil well investments provide substantial tax incentives for investors.
Tax Deductions for Investments
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 tax deductions for investments in oil and gas.
The IRS offers substantial tax breaks for investors such as the intangible drilling cost (IDC) deduction in which an investor can deduct up to 80% of the investment during the year of the investment. 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.
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 based on earned income savings.
They also receive additional tax deductions for investments based on production values and depletion of the reserves.
Due Diligence and Diversification
Just like commercial real estate, factors such as site location, quality and cash flow potential are all important considerations for well 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. That’s one reason oil and gas professionals love to invest directly in oil wells too.
Adding Well Investments to Your Portfolio
While individuals with experience in commercial real estate see the need to diversify into other asset classes, the financial barrier to entry for oil 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 well investments. 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.