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Hello everyone.
Sorry for not keeping these articles coming. I have been busy raising a family and pursuing my other interest of composing original instrumental rock/jazz music on keyboards and drums. If interested, you can follow my fan page on facebook at www.facebook.com/olecrammusic. You can also follow me on YouTube with my channel www.youtube.com/olecrammusic or on Twitter www.twitter.com/olecrammusic. Having said that, I wanted to provide a summary here that provides links to all my past key articles for easy, quick reference. Thank you all for being loyal readers. My best wishes to you.
Ole Cram
This is a table of contents for all previous key articles. Provided for quick access.
Understanding accredited investors:
Understanding accredited investors
http://accreditedinvestortalk.blogspot.com/2008/03/undestanding-accredited-investors.html
What differentiates a successful accredited investor? What makes them successful?
http://accreditedinvestortalk.blogspot.com/2008/08/part-1-what-differentiates-successful.html
You may be an accredited investor and not know it
http://accreditedinvestortalk.blogspot.com/2008/03/you-may-be-accredited-investor-and-not.html
General articles:
Being laid off? Think about becoming an entrepreneur
http://accreditedinvestortalk.blogspot.com/2009/03/being-laid-off-think-about-becoming.html
The cost of borrowing from your tax deferred account
http://accreditedinvestortalk.blogspot.com/2009/02/cost-of-borrowing-from-your-tax.html
Understanding inflation and how it affects you
http://accreditedinvestortalk.blogspot.com/2009/01/part-1-understanding-inflation-and-how.html
Understanding debt and mortgage related:
Understanding debt (what it really costs you and how to get out of it)
http://accreditedinvestortalk.blogspot.com/2008/12/understanding-debt-credit-card-trap.html
Should you pay off your mortgage early?
http://accreditedinvestortalk.blogspot.com/2009/04/should-you-pay-off-your-home-mortgage.html
Fallacy of buying a home for the tax deduction
http://accreditedinvestortalk.blogspot.com/2008/09/fallacy-of-buying-home-for-tax.html
Investing in general:
Why do you need to earn a higher rate than the percentage of investment loss?
http://accreditedinvestortalk.blogspot.com/2009/03/why-do-you-need-to-earn-higher-rate.html
Don't let fear drive your investment decisions
http://accreditedinvestortalk.blogspot.com/2009/02/dont-let-fear-drive-your-investment.html
Understanding compounding interest
http://accreditedinvestortalk.blogspot.com/2008/12/part-1-compounding-interest.html
Psychology of trading - how pros count on emotional amateurs
http://accreditedinvestortalk.blogspot.com/2008/12/understanding-debt-strategies-for.html
Investing in stocks/options:
Stocks - Understanding the use of margins
http://accreditedinvestortalk.blogspot.com/2008/11/stocks-understanding-use-of-margins.html
Understanding stocks - how businesses generate funds from initial sale of stock
http://accreditedinvestortalk.blogspot.com/2008/11/understanding-stocks-atm-for-business.html
Understanding options
http://accreditedinvestortalk.blogspot.com/2008/10/options-understanding-puts-making-money.html
Stocks: Understanding stock shorting - making money when a stock price goes down
http://accreditedinvestortalk.blogspot.com/2008/09/stocks-understanding-stock-shorting.html
Investing in oil and gas drilling ventures:
Almost everything you need to know about oil and gas drilling investments
http://accreditedinvestortalk.blogspot.com/2008/09/almost-everything-you-need-to-know.html
An example of a combined Oil and Gas and Real Estate investment
http://accreditedinvestortalk.blogspot.com/2008/09/combined-oil-gas-and-real-estate.html
Thank you again for following my articles. I hope they have been of some benefit to you with your financial goals.Ole Cram
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This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/
Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.
Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Sphere: Related Content
Showing posts with label real estate. Show all posts
Showing posts with label real estate. Show all posts
Thursday, January 19, 2012
Sunday, September 28, 2008
A combined Oil & Gas and Real Estate Investment – The best of both worlds
Intro:
I get emails and phone calls resulting from reading this Accredited Investor Talk blog. One discussion I had this week was with an oil and gas (O&G) investor who combines these investments with real estate. I thought his strategy would be of interest to both the oil and gas investors and real estate investors who follow this blog.
Concept:
Most of my previous articles on oil and gas investments assume someone else owns the associated land where these wells are drilled, but the partnership funding the drilling projects secures the rights to a lease for drilling on the land. In the case of the investor I talked with, he first buys land near Texas cities with strong suburb growth that are also strong prospects for oil or gas. Once the land is purchased, he drills and puts the associated wells online to generate cash flow from the land. Later, when the value of the land grows from nearby homes being developed in the suburb, this investor starts also developing the land with homes to sell.
My thoughts on a plan for this type of investment:
- Create a detailed business plan and investment strategy before even starting this project: One of the first steps before starting this project must be a detailed business plan and associated investment strategy. The business plan needs to detail what the entry and exit strategies are for the various phases of this project (the O&G phases and real estate phases). It needs to detail all the key stakeholders in the project, their roles and responsibilities, and how they will be compensated. The plan should document the various probabilities of success (and failure) for each phase of the project which links to the level of risk involved. The plan should also discuss what the investment strategy is for this project which should relate to the probabilities and risk levels involved. There are infinite strategies that could be used throughout the project. Will other investors be brought in for various phases of the project or will all funds come from the initial investors only? Having a clear strategy identified and documented in the business plan for each phase of the project helps keep the focus and helps articulate the project to others. I’ve written a past article on an O&G investor’s investment strategy that provides an example of one O&G investment strategy.
- Buying the right land: This investment should include land with a strong probability of containing productive oil and gas deposits. One way to raise the odds of buying potentially productive land is to buy near other productive wells. The logs from these wells should be reviewed to see potential O&G deposits underground in this land. However, purchasing land near current producing O&G wells usually means the price of this land will be high. This must be considered in any revenue model used to support a business plan for this combined real estate and O&G drilling venture. If you over pay for the land, then the revenue from the wells won’t provide enough returns to make the project profitable enough to counter the high risks involved.
- Finding a good developer for the O&G drilling projects: My personal thoughts are a project of this size and cost should use the services of a very capable oil developer to ensure the highest probability of success with hopefully drilling many profitable O&G wells. Unless the investor has a very strong background with the associated experience to develop these wells, due diligence should be conducted to select the best developer for this project. The business plan should state whether outside investors will be used to fund these wells or if funds will come from the initial project’s investors. A good developer will be able to raise outside investor funding for these projects, if that is what the business plan calls for. As a side note, I have written a complete series of articles that covers all the steps needed to drill O&G wells.
- Managing the cash flow: The project needs to clearly document how cash generated from the O&G wells will be used. Will they be used to: 1) pay down debts including purchase of the land, 2) pay back investors, 3) fund additional O&G wells, 4) initiate development of the real estate, 5) paying ongoing expenses, etc. These wells will not provide income forever as the associated limited supply of oil and gas is pumped out. Therefore, a clear strategy must be defined on where the resulting revenues will be directed - leveraged/or not, reinvested, or otherwise spent. Once the revenues start coming in from he real estate development side of the project, this too must be defined and planned. In all situations, the resulting tax issues must be known and dealt with in the cash flow strategy.
- Finding a good developer of the real estate projects: Again, unless the creators of this project have the necessary experience developing successful real estate projects, a successful real estate developer should be used. This may cost more, but their ability to develop successful projects should reduce the risks involved.
- Define what real estate revenue strategy will be used: Will the land be sub-divided and sold off as homes/commercial sites are developed? This would provide large funds to the investors while also giving them an exit strategy as the real estate is sold off. Alternatively, will apartments and/or commercial buildings be built and leased or rented for ongoing revenues to the investors? This would generate ongoing income to the investors while also hopefully providing capital gains as these property values increase. Perhaps a hybrid strategy will be used that considers selling off some of the land while keeping other portions for ongoing rental revenues. That solution provides both large upfront revenues from sales and ongoing revenues from the remaining rental properties.
- Exit strategy: An exit strategy must be defined on how the investors will be able to sell out their interest in the project. Will the project be taken public (if it is large enough) where investors could sell out their shares on the market? Will other investors have the right to buy out an investor’s interest in some other way? An exit strategy needs to be defined and agreed to by all associated investors before the project is started. There should also be agreement between involved investors on what happens in special situations such as the death of an investor, divorce, law suit, etc. All of these things could severely impact the project without an agreed upon plan for each situation that ensures the remaining investors are able to continue moving forward with the project. To cover all of these issues, I highly recommend using a lawyer to draw up documents before investors put in a cent.
Summary:
This is an interesting way of getting the best from real estate and O&G investments, including all of the unique tax benefits provided to O&G investors and other tax benefits provided to real estate investors. However, there are many issues that must be understood and addressed before starting such a project. I don’t pretend to have all of those issues covered in this short article. Any project of this size should employ the best talented people available to ensure success in all phases. If that happens, any included investor would be very richly rewarded.
Your feedback is wanted:
Please provide feedback to our generic email at MarcobeInvestmentsInc@gmail.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers. Happy investing to you.
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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. We are not licensed to sell any interest in a project, nor are we registered advisors. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for other topics to cover in future articles.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Key past articles related to investments in oil and gas can be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Sunday, June 22, 2008
Debt Free Wealth Generation From A Good Oil and Gas Investment Strategy
Only use risk capital when investing in oil and gas drilling ventures.
When considering investing in oil and gas drilling ventures, only risk capital should be used. As with any investment, if you are not comfortable risking the loss of money, then you are investing too much. This level of comfort differs for each investor. You need to decide what your comfort level is. Once decided, follow an investment strategy that maximizes your returns while minimizing your losses.
A basic strategy for oil and gas drilling investments:
· Don’t invest in only one or two wells. Reduce your risk by spreading the available funds over several wells.
· Invest approximately the same total funds in each oil and gas drilling project. Using the same amount of funding keeps you disciplined and consistent. You wont be as susceptible to an oil producer trying to more in one project since it is a “sure thing”.
· Only consider investing in wells that are projected to return your investment in 6 to 18 months.
· Develop a reinvestment plan into additional wells. Decide what percentage of oil/gas revenues from your wells to should be reinvested in additional wells. This way your income continues to rise from consistently adding new wells at the same time your older wells start dropping in production.
Consider an example of diversifying over several wells:
Let’s look at an example showing how diversification provides the best combination of risk verses return. In this example you have $100,000 total to invest. You invest approximately the same portion of this money across four wells. It is may be impossible to invest exactly the same in each well since the cost to participate may differ from well-to-well.
When considering investing in oil and gas drilling ventures, only risk capital should be used. As with any investment, if you are not comfortable risking the loss of money, then you are investing too much. This level of comfort differs for each investor. You need to decide what your comfort level is. Once decided, follow an investment strategy that maximizes your returns while minimizing your losses.
A basic strategy for oil and gas drilling investments:
· Don’t invest in only one or two wells. Reduce your risk by spreading the available funds over several wells.
· Invest approximately the same total funds in each oil and gas drilling project. Using the same amount of funding keeps you disciplined and consistent. You wont be as susceptible to an oil producer trying to more in one project since it is a “sure thing”.
· Only consider investing in wells that are projected to return your investment in 6 to 18 months.
· Develop a reinvestment plan into additional wells. Decide what percentage of oil/gas revenues from your wells to should be reinvested in additional wells. This way your income continues to rise from consistently adding new wells at the same time your older wells start dropping in production.
Consider an example of diversifying over several wells:
Let’s look at an example showing how diversification provides the best combination of risk verses return. In this example you have $100,000 total to invest. You invest approximately the same portion of this money across four wells. It is may be impossible to invest exactly the same in each well since the cost to participate may differ from well-to-well.
When the wells are complete and in production, we see the various monthly returns for each and further see that well #2 turned out to be a dry hole or non-producing well. The return on investment with the other three wells varies from a high of 200% to 67% with an overall combined return of 93% across all four wells.
Had you invested the full $100,000 in well #1, the total return would have been maximized. However, you would have risked losing all of your funds had it turned out to be a dry hole like well #2. Alternatively, had you only invested in two wells with the dry hole well #2 being one and either well #3 or #4 being the other, your combined returns would have been much less than the current diversified 93% across the four wells. Therefore, investing everything in one or two wells hoping for a 200% ROI Well #1 is not worth the risk, and misses out on the strong diversified 93% ROI.
A long term strategy for oil and gas drilling investments:
Every well runs dry at some point in the future with some wells only lasting a short time while others last for many years. It is important that you continually add to your portfolio of oil and gas wells to replenish lost income from the older wells as they slow down. As stated earlier, a portion of the income from your wells should be reinvested into additional wells. Beyond trying to maintain the same level of combined income, you should consider reinvesting even more so your resulting yearly income is always increasing. Over the long run, continued diversification will minimize your risk of loss while providing consistently increasing income. Another reason to continue reinvesting in additional wells is to take advantage of the tax write-offs against the income from these wells.
Consider an example of reinvesting oil/gas income into additional wells:
In the previous example we received a combined 93% ROI over four wells. This means we will receive $93,000 income from those wells in the first year. If we reinvest a little over half of that into two additional wells at $25,000 each, then the resulting income would be significantly higher while lowering our risk over more wells. This assumes the first wells continue to provide a strong payout after the first year.
Scale up your investments as income grows:
Continuing this strategy provides you with increasing income that is debt free. You are using income to buy additional income. This is a very powerful way of having your money work for you to increase your wealth. Eventually, as your income increases, you will be able to participate in larger projects while increasing your percentage ownership in the associated partnerships. You could scale up your average investment per well from $25,000 in this case to $50,000, then $75,000, etc. This may mean purchasing additional percentage ownership in these projects or participation in larger projects that require more funds per percent ownership. Also keep in mind that ongoing investment in additional wells provides associated tax write-offs against the growing income stream.
Your input is desired for future article topics:
We want to hear from you. What oil and gas investing related questions to you have that we have not already covered? Please email topics you would like us to consider at our generic email address MarcobeInvestmentsInc@gmail.com. Also, email us if you have any other thoughts or questions for us to answer. Thank you.
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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Sunday, June 15, 2008
Part 5: Oil and gas investments vs. real estate investments
Fifth article in a series on comparing oil and gas investments to real estate investments:
This is the fifth and final in a series of articles based on my own experiences with investments in oil and gas verses real estate. You can read the first article here.
Summary of comparisons between real estate and oil and gas investments:
Time commitment:
- Up front time before investing - Both require considerable time up front to chose the right investment that fits within your investing strategy/goals.
- Ongoing time after investment is made – Most oil and gas investments only require time to deposit checks periodically and to extract info from the K-1 tax form yearly. Real estate, on the other hand, requires time for continuous monitoring of - market conditions; monthly expenses for repairs, rent ads, upgrades; regulation/code compliance; liability exposure/insurance; currency of property tax payments; unplanned events/expenses; crime/violence issues/vandalism; and others. Some of these can be passed to a property manager at a cost, but even they will need your permission and time to deal with many of these issues.
Simplicity:
- Once an investment is made in a oil and gas venture, the investor sits back and waits for income and K-1 forms.
- Real estate investments require monitoring many issues on an ongoing basis.
Income hedge against inflation:
- Income from producing oil/gas wells will go up as the price of oil/gas goes up until the well starts to lose production over time. The investor should have continued diversifying through tiered investment in additional wells to maximize ongoing revenues over time.
- Income from income property will follow market conditions. When markets are tight, income rises fastest. In down markets, there is more competition and income tends to flatten or even decline. Diversification over different types of income properties can help alleviate this issue. Good real estate investors will plan their portfolio to balance each other under different market conditions.
Tax related benefits:
- Direct invested funds in most domestic oil and gas drilling ventures are 100% deductible dollar per dollar against all income types (passive, active, portfolio, capital gain, and up to 40% of AMT income). Typically 70-90% can be deducted the 1st year for intangible drilling costs with the remaining intangible costs deducted over seven years. In addition, the first 15-23% of yearly income is tax free due to the depletion allowance (similar to how depreciation works for real property).
- For real estate, expenses are deductible. An income related tax benefit to the investor is the depreciation allowance on buildings usually over 27 years.
Liability exposure:
- Oil and gas drilling ventures have the highest liability exposure during the drilling of a well. However, this liability is usually contractually the responsibility of the driller to cover with insurance. Therefore, the investor in a partnership have very little to no exposure. The only other period of liability is during transportation of the oil/gas, which again is usually the responsibility of the transporting company to cover.
- Real estate investors have full liability exposure at all times to fire, earthquake, tornado, and other mother nature events; vandalism; theft; crime events when someone is injured or killed; other injury or death due to issues with your property; and other exposures. Owners must maintain good insurance that specifically covers all events that could happen including the ones mentioned here. There are ways of structuring the real estate investor’s portfolio to limit liability exposure through asset protection methods. However, there is usually still some potential for financial exposure that, at a minimum, could involve legal fees to defend.
Use of debt/leverage:
- Oil and gas investors usually use risk capital for investing and do not borrow funds for this purpose. Therefore, they tend to build cash flow very quickly from good wells that provides funds to continue investing in additional wells. When done right over time with the right investment strategy, this can result in significant increasing cash flow through reinvestment while maintaining no debt exposure.
- Real estate investments usually involve some level of debt for leverage. One of the benefits of real estate has been the use of leverage (“other people’s money”) to multiply the returns on the investors invested funds. When done right over time, real estate investors are able to greatly increase their wealth. However, there is usually some level of exposure to issues related to debt. Investors may have a strategy to eventually sell some of their portfolio of properties to pay off all debts on the remaining properties. This would result in a debt free cash flow income that hopefully increases over time as rents increase.
Final thoughts:
As we end this series comparing oil and gas drilling investments to real estate investments, I wish to reiterate that the intention of these articles is not to say real estate investing is inferior to oil and gas drilling investing. In fact, they complement each other very well as components of a total investment portfolio for high net individuals, investment trusts, institutional investors, investment partnerships, corporate investors, and other investment related entities. Each of these needs to consider their respective investing strategy/goals to determine what percentage of risk capital to put into real estate and/or oil and gas investments. What you don’t want to do is blindly go into any investment without a plan, strategy, and goal to guide the daily decisions that will lead you to those associated targets. Taking the first step is always the hardest. Methodically taking each additional step forward will hopefully lead you on the right path toward continued success.
Your input is desired for future article topics:
We want to hear from you. What oil and gas investing related questions to you have that we have not already covered? Please email topics you would like us to consider at our generic email address MarcobeInvestmentsInc@gmail.com. Also, email us if you have any other thoughts or questions for us to answer. Thank you.
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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Sunday, June 8, 2008
Part 4: Oil and gas investments vs. real estate investments
Fourth article in a series on comparing oil and gas investments to real estate investments:
This is the fourth in a series of articles based on my own experiences with investments in oil and gas verses real estate. You can read the first article here.
Comparing tax advantages/issues:
For real estate investments, usually only expenses and losses are deductible during each year the property is owned. When purchasing a property, expenses generally total 5 to 10% of the price.
For well executed real estate purchases, income from the property (and/or potential future capital gain) will more than cover these expenses. If not, then the losses are deductible, but the owner must carry these losses until the property becomes profitable or is passed to another party. Sophisticated real estate investors have developed other tax advantages. This article refers to the average real estate investor/investment.
One other tax advantage for real estate is the ability to depreciate the property (building/structure) over time, usually about 27 years. The land is not depreciated in most cases. The assumption is that the government says the building will only last that long at which time it will have a value of zero dollars. In reality, buildings usually last much longer than this. In locations where land is very valuable, the depreciation is against a small portion of the overall property value.
For direct participation in domestic oil and gas drilling ventures, you can write off the full amount of invested funds against all income types (active, passive, portfolio, capital gains, etc.). The intangible drilling costs (IDC) of a well can be written off immediately in the first year of the investment and can range between 70-90% of the invested funds. The remaining portion of the investment covers tangible costs and is written off over seven years. A past article covers this in more detail.
Other advantages of these oil and gas ventures are:
Next article in the series:
The next article will continue these comparisons between oil/gas investments and investments in real estate.
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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content
This is the fourth in a series of articles based on my own experiences with investments in oil and gas verses real estate. You can read the first article here.
Comparing tax advantages/issues:
For real estate investments, usually only expenses and losses are deductible during each year the property is owned. When purchasing a property, expenses generally total 5 to 10% of the price.
For well executed real estate purchases, income from the property (and/or potential future capital gain) will more than cover these expenses. If not, then the losses are deductible, but the owner must carry these losses until the property becomes profitable or is passed to another party. Sophisticated real estate investors have developed other tax advantages. This article refers to the average real estate investor/investment.
One other tax advantage for real estate is the ability to depreciate the property (building/structure) over time, usually about 27 years. The land is not depreciated in most cases. The assumption is that the government says the building will only last that long at which time it will have a value of zero dollars. In reality, buildings usually last much longer than this. In locations where land is very valuable, the depreciation is against a small portion of the overall property value.
For direct participation in domestic oil and gas drilling ventures, you can write off the full amount of invested funds against all income types (active, passive, portfolio, capital gains, etc.). The intangible drilling costs (IDC) of a well can be written off immediately in the first year of the investment and can range between 70-90% of the invested funds. The remaining portion of the investment covers tangible costs and is written off over seven years. A past article covers this in more detail.
Other advantages of these oil and gas ventures are:
- First 15 to 23% of yearly income is tax free due to a depletion allowance. This acts much in the same way as depreciation of buildings does for real estate. The Depletion allowance assumes the well will be dry after 7 years like real estate assumes a building is worthless after 27 years (see related article).
- Income from a domestic oil or gas well will not count toward alternative minimum tax (AMT) income like it will for real estate (see related article). Income from property may put you into a AMT situation.
- You can reduce up to 40% of your AMT dollar per each invested dollar invested in a domestic oil/gas drilling investment (see same past article as previous bullet above). In general, real estate does not provide this benefit.
- You can reduce and possibly eventually eliminate capital gains taxes on 1031 exchanged assets by selling them outside of a 1031 exchange and investing the proceeds in domestic oil and gas drilling investments. Use the high first year intangible drilling cost write-off (70-90%) to eliminate taxes on that portion. Use the seven year write-off tangible costs to eliminate taxes on the remaining portion (the other 30 -10%) (see related article). Most real estate require paying taxes when selling outside of a 1031 exchange.
Next article in the series:
The next article will continue these comparisons between oil/gas investments and investments in real estate.
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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content
Monday, June 2, 2008
Part 3: Oil and gas investments vs. real estate investments
Third article in a series on comparing oil and gas investments to real estate investments:
This is the third in a series of articles based on my own experiences with investments in oil and gas verses real estate. You can read the first article here.
Regulation and additional liability issues:
For oil and gas investments, the investor has very little to no liability exposure (see article 1 of this series) and no regulation issues other than SEC regulations for accredited investors. The oil developer is responsible for the liability and all regulation requirements to drill and put a oil/gas well into production. The investor has no time commitment required other than funding the investment. However, for real estate, you read more and more these days about new regulations being added to income property owners at the city, county, state, and federal levels.
Some cities now require rental dwelling (apartment, house, etc.) owners to be licensed. The intent is to teach owners about code requirements, how to get rid of bad tenants, how to reduce crime, how to find quality renters, etc. With a license, the city can control the quality of property owners, reduce crime, and increase the quality of rental units for current renters. This licensing requirement is growing as many cities experience success in raising the quality of tenants and rental properties while reducing crime. Another desired benefit is increased tax revenues as property values rise (hopefully) due to more desirable housing/properties.
There are many other regulations either being considered or currently in effect on income property owners. Laws are being considered to require designated smoking areas within apartment complexes. Owners are being held personally liable for crimes committed on their properties with claims the owner didn’t do enough to prevent the crime.
Additional real estate insurance issues (see the first article in the series as well):
If proven guilty of not properly safeguarding the property, you may have insurance issues if the insurance company also feels you didn’t do enough to prevent the crime. They may not pay damages in that case. Outside of crime issues, the insurance coverage you have on a property may not cover natural disasters such as earthquakes. Many property owners don’t realize they need to purchase separate insurance for earthquakes and these policies don’t usually cover the full replacement cost of the structure. The owner usually has a large deductible that will need paid to rebuild. Also, the insurance may not have kept up with increased property values so will pay out much less than the new increased cost to replace the structure.
Next article in the series:
The next article will continue these comparisons between oil/gas investments and investments in real estate.
- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content
This is the third in a series of articles based on my own experiences with investments in oil and gas verses real estate. You can read the first article here.
Regulation and additional liability issues:
For oil and gas investments, the investor has very little to no liability exposure (see article 1 of this series) and no regulation issues other than SEC regulations for accredited investors. The oil developer is responsible for the liability and all regulation requirements to drill and put a oil/gas well into production. The investor has no time commitment required other than funding the investment. However, for real estate, you read more and more these days about new regulations being added to income property owners at the city, county, state, and federal levels.
Some cities now require rental dwelling (apartment, house, etc.) owners to be licensed. The intent is to teach owners about code requirements, how to get rid of bad tenants, how to reduce crime, how to find quality renters, etc. With a license, the city can control the quality of property owners, reduce crime, and increase the quality of rental units for current renters. This licensing requirement is growing as many cities experience success in raising the quality of tenants and rental properties while reducing crime. Another desired benefit is increased tax revenues as property values rise (hopefully) due to more desirable housing/properties.
There are many other regulations either being considered or currently in effect on income property owners. Laws are being considered to require designated smoking areas within apartment complexes. Owners are being held personally liable for crimes committed on their properties with claims the owner didn’t do enough to prevent the crime.
Additional real estate insurance issues (see the first article in the series as well):
If proven guilty of not properly safeguarding the property, you may have insurance issues if the insurance company also feels you didn’t do enough to prevent the crime. They may not pay damages in that case. Outside of crime issues, the insurance coverage you have on a property may not cover natural disasters such as earthquakes. Many property owners don’t realize they need to purchase separate insurance for earthquakes and these policies don’t usually cover the full replacement cost of the structure. The owner usually has a large deductible that will need paid to rebuild. Also, the insurance may not have kept up with increased property values so will pay out much less than the new increased cost to replace the structure.
Next article in the series:
The next article will continue these comparisons between oil/gas investments and investments in real estate.
- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content
Monday, May 26, 2008
Part 2: Oil and gas investments vs. real estate investments
Second article in a series on comparing oil and gas investments to real estate investments:
This is the second in a series of articles based on my own experiences with investments in oil and gas verses real estate. You can read the first article here and next article here.
Considering the risks of investing (part 2):
Investing in oil and gas drilling ventures usually involves available risk capital whereas investing in real estate usually involves significant debt. Both investments involve risk. The risk and reward differs for each oil and gas drilling venture and for each real estate project. It is up to the investor to do enough due diligence when considering any investment to learn as much about the risks and potential rewards. When the risks and rewards are understood, then they can be compared between each other to make a decision on where to actually invest the available risk capital. The level of risk can be mitigated by conducting research to ensure investment in those oil and gas projects or real estate projects that have the optimal risk to reward ratio that fits your investment strategy.
Building wealth on cash verses debt:
Building wealth in Oil and gas drilling ventures involves the risk of investing in bad wells that don’t pay out. However, you don’t have the risk of large debt that real estate investments carry (unless you pay mostly cash for the property). As stated earlier, you can mitigate the potential of a bad oil/gas well by investing with oil producers with strong track records (read our previous article “Conducting due diligence before investing in an oil or gas project”). Also, watch for red flags when considering oil and gas investments (see our previous article “What to watch out for when considering specific oil and gas investment opportunities”).
Once you find an oil producer who consistently produces oil/gas wells that pay good revenues to invested funds with an acceptable number of bad wells, you can continue reinvesting revenues in new wells. Over time, as you reinvest in new wells, you will be building an increasing income stream with significant tax free revenue and significant tax deductions of all invested funds against all income (no other investment vehicle gives the tax advantages of domestic oil and gas drilling ventures). Your wealth will be built on cash with no debt, no worries about managing real estate, and no time commitment other than considering each oil/gas well presented before deciding on the ones to invest in.
With real estate, you can make a lot of money quickly by buying the right investment at the right price with the right leverage. However, as stated above, most real estate investments involve significant debt. This debt usually must be paid very soon after taking possession of the property meaning it must be in income producing condition with a renter very soon to cover the debt payments. Seasoned real estate investors spend a lot of time evaluating potential properties before deciding on the one to invest in. Once the property is decided, the optimal amount of down payment must be determined to bring the periodic debt payments down to a level acceptable against the expected income. The buyer must also consider the other costs against the property such as property taxes, maintenance, upgrades, management fees, liability insurance, hazard insurance, renter incentives, and other costs. A seasoned real estate investor will not buy a property that is not able to get the rental income needed to cover all of these costs. Many novice investors get stuck with properties that are negative since they may not have considered all of these expenses required to keep a property in rentable condition. If done right, real estate is very profitable.
The most successful real estate investors build a portfolio of positive income producing properties that generate income needed to invest in other properties. When the leveraging of debt works in their favor, they care able to turn relatively small amounts of cash into significant wealth in time. However, not many will pay off all of their debts. Therefore, there is always the risk of debt that comes with wealth from real estate.
My personal preference toward domestic oil and gas ventures:
Personally, I like building wealth without debt through being selective about oil and gas drilling ventures that minimize the risk while maximizing the potential return on investment. I will not invest in a oil/gas project that does not have a significant probability of returning my full investment within one year. I also like the much stronger tax advantages of domestic oil and gas drilling ventures over real estate. Building wealth based on cash means less stress, and it provides extra income to consider other investments that may initially start negative before they also become positive.
Next article in this series:
The next article will continue these comparisons
- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content
This is the second in a series of articles based on my own experiences with investments in oil and gas verses real estate. You can read the first article here and next article here.
Considering the risks of investing (part 2):
Investing in oil and gas drilling ventures usually involves available risk capital whereas investing in real estate usually involves significant debt. Both investments involve risk. The risk and reward differs for each oil and gas drilling venture and for each real estate project. It is up to the investor to do enough due diligence when considering any investment to learn as much about the risks and potential rewards. When the risks and rewards are understood, then they can be compared between each other to make a decision on where to actually invest the available risk capital. The level of risk can be mitigated by conducting research to ensure investment in those oil and gas projects or real estate projects that have the optimal risk to reward ratio that fits your investment strategy.
Building wealth on cash verses debt:
Building wealth in Oil and gas drilling ventures involves the risk of investing in bad wells that don’t pay out. However, you don’t have the risk of large debt that real estate investments carry (unless you pay mostly cash for the property). As stated earlier, you can mitigate the potential of a bad oil/gas well by investing with oil producers with strong track records (read our previous article “Conducting due diligence before investing in an oil or gas project”). Also, watch for red flags when considering oil and gas investments (see our previous article “What to watch out for when considering specific oil and gas investment opportunities”).
Once you find an oil producer who consistently produces oil/gas wells that pay good revenues to invested funds with an acceptable number of bad wells, you can continue reinvesting revenues in new wells. Over time, as you reinvest in new wells, you will be building an increasing income stream with significant tax free revenue and significant tax deductions of all invested funds against all income (no other investment vehicle gives the tax advantages of domestic oil and gas drilling ventures). Your wealth will be built on cash with no debt, no worries about managing real estate, and no time commitment other than considering each oil/gas well presented before deciding on the ones to invest in.
With real estate, you can make a lot of money quickly by buying the right investment at the right price with the right leverage. However, as stated above, most real estate investments involve significant debt. This debt usually must be paid very soon after taking possession of the property meaning it must be in income producing condition with a renter very soon to cover the debt payments. Seasoned real estate investors spend a lot of time evaluating potential properties before deciding on the one to invest in. Once the property is decided, the optimal amount of down payment must be determined to bring the periodic debt payments down to a level acceptable against the expected income. The buyer must also consider the other costs against the property such as property taxes, maintenance, upgrades, management fees, liability insurance, hazard insurance, renter incentives, and other costs. A seasoned real estate investor will not buy a property that is not able to get the rental income needed to cover all of these costs. Many novice investors get stuck with properties that are negative since they may not have considered all of these expenses required to keep a property in rentable condition. If done right, real estate is very profitable.
The most successful real estate investors build a portfolio of positive income producing properties that generate income needed to invest in other properties. When the leveraging of debt works in their favor, they care able to turn relatively small amounts of cash into significant wealth in time. However, not many will pay off all of their debts. Therefore, there is always the risk of debt that comes with wealth from real estate.
My personal preference toward domestic oil and gas ventures:
Personally, I like building wealth without debt through being selective about oil and gas drilling ventures that minimize the risk while maximizing the potential return on investment. I will not invest in a oil/gas project that does not have a significant probability of returning my full investment within one year. I also like the much stronger tax advantages of domestic oil and gas drilling ventures over real estate. Building wealth based on cash means less stress, and it provides extra income to consider other investments that may initially start negative before they also become positive.
Next article in this series:
The next article will continue these comparisons
- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content
Monday, May 19, 2008
Part 1: Oil and gas investments vs. real estate investments
First article in a series on comparing oil and gas investments to real estate investments:
This is the first in a series of articles to come based on my own experiences with investments in oil and gas verses real estate (you can read the next article here). These articles are not meant to be comprehensive or definitive on all of the benefits and pitfalls of either. My intent is to provide a comparison of both investment vehicles from the point of view of any accredited investor who does not have a lot of time to manage investments. It is not meant for very sophisticated investors in real estate who have mastered the art of always buying positive income properties. That would be the subject of another article.
Considering the risks and rewards of both:
I have invested in many real estate and oil and gas drilling projects for several years. Both have their good and bad points. Both involve risks and both have the potential for huge rewards. The risk and reward differs for each oil and gas drilling venture and for each real estate project. It is up to the investor to do enough due diligence when considering any investment to learn as much about the risks and potential rewards. When the risks and rewards are understood, then they can be compared between each other to make a decision on where to actually invest the available risk capital. In this light, this series of articles are biased on the side of oil and gas drilling investments over real estate for several reasons.
Considering the time commitment for both:
Oil and gas drilling ventures only require up front investigation to find the right project with the risk to reward ratio that fits your investment strategy. Do your homework up front and invested with an oil/gas project that minimizes risks (use of latest seismic technology, highly experienced oil producer and drilling rig operator, use of latest drilling technology like horizontal drilling far into the pay-zone, etc.) while maximizing returns (consider projects that project return of investment in 6 to 18 months for the risks involved). Once a well is chosen and invested in, your time commitment drops nearly to none. The oil producer then takes over and does all the work to hopefully get you a productive well that regularly sends you a check every month. Your only time commitment is depositing the check (if not done electronically from the producer) and entering the project’s K-1 tax information into your tax returns yearly.
With real estate, you can never fully let go of the investment. Renters call for repairs: plugged up sewage lines, leaks, carpet wear, broken appliances, and many other things. Even with a property manager, they require approval for repairs over a set limit and will ask you to send a check immediately to cover the repairs. You always have to be near a phone where they can reach you for those large unexpected repairs. Also, you are at the mercy of the renter who may vandalize the apartment when leaving.
Considering liability exposure for both:
You have very little to no liability exposure with a properly structured oil or gas drilling investment. Look for the oil developer or operator to carry liability insurance for the drilling project. Liability exposure is mostly a factor during the drilling of the well. Once the well is completed and put online, there is no real ongoing liability risk. The resulting oil or gas makes its way to the refinery in one of several methods – trucks, train, barge/boat, or pipeline. The owners of these methods should carry liability insurance that insulates you from exposure. Therefore, at no time with properly structured oil or gas investments do you need to carry liability insurance unless you are drilling the well.
For real estate, there is always a liability exposure to the owner. Renters can get hurt in any number of ways by any number of things. Injury can come from appliances exploding or catching fire, other causes of fire, violent incidents, accidental injury on the property, damage to vehicle, drug or gang problems, etc. Many things can be mitigated, but there is always some level of liability exposure for the owner that requires ongoing insurance. Also, the insurance may or may not cover all damages from a large law suit such as the death of a tenant blamed on something you did do or something you did not do, but should have. Lawyers love landlords who have not properly protected their assets before tenants are injured.
Next article in the series:
The next article will continue these comparisons
- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content
This is the first in a series of articles to come based on my own experiences with investments in oil and gas verses real estate (you can read the next article here). These articles are not meant to be comprehensive or definitive on all of the benefits and pitfalls of either. My intent is to provide a comparison of both investment vehicles from the point of view of any accredited investor who does not have a lot of time to manage investments. It is not meant for very sophisticated investors in real estate who have mastered the art of always buying positive income properties. That would be the subject of another article.
Considering the risks and rewards of both:
I have invested in many real estate and oil and gas drilling projects for several years. Both have their good and bad points. Both involve risks and both have the potential for huge rewards. The risk and reward differs for each oil and gas drilling venture and for each real estate project. It is up to the investor to do enough due diligence when considering any investment to learn as much about the risks and potential rewards. When the risks and rewards are understood, then they can be compared between each other to make a decision on where to actually invest the available risk capital. In this light, this series of articles are biased on the side of oil and gas drilling investments over real estate for several reasons.
Considering the time commitment for both:
Oil and gas drilling ventures only require up front investigation to find the right project with the risk to reward ratio that fits your investment strategy. Do your homework up front and invested with an oil/gas project that minimizes risks (use of latest seismic technology, highly experienced oil producer and drilling rig operator, use of latest drilling technology like horizontal drilling far into the pay-zone, etc.) while maximizing returns (consider projects that project return of investment in 6 to 18 months for the risks involved). Once a well is chosen and invested in, your time commitment drops nearly to none. The oil producer then takes over and does all the work to hopefully get you a productive well that regularly sends you a check every month. Your only time commitment is depositing the check (if not done electronically from the producer) and entering the project’s K-1 tax information into your tax returns yearly.
With real estate, you can never fully let go of the investment. Renters call for repairs: plugged up sewage lines, leaks, carpet wear, broken appliances, and many other things. Even with a property manager, they require approval for repairs over a set limit and will ask you to send a check immediately to cover the repairs. You always have to be near a phone where they can reach you for those large unexpected repairs. Also, you are at the mercy of the renter who may vandalize the apartment when leaving.
Considering liability exposure for both:
You have very little to no liability exposure with a properly structured oil or gas drilling investment. Look for the oil developer or operator to carry liability insurance for the drilling project. Liability exposure is mostly a factor during the drilling of the well. Once the well is completed and put online, there is no real ongoing liability risk. The resulting oil or gas makes its way to the refinery in one of several methods – trucks, train, barge/boat, or pipeline. The owners of these methods should carry liability insurance that insulates you from exposure. Therefore, at no time with properly structured oil or gas investments do you need to carry liability insurance unless you are drilling the well.
For real estate, there is always a liability exposure to the owner. Renters can get hurt in any number of ways by any number of things. Injury can come from appliances exploding or catching fire, other causes of fire, violent incidents, accidental injury on the property, damage to vehicle, drug or gang problems, etc. Many things can be mitigated, but there is always some level of liability exposure for the owner that requires ongoing insurance. Also, the insurance may or may not cover all damages from a large law suit such as the death of a tenant blamed on something you did do or something you did not do, but should have. Lawyers love landlords who have not properly protected their assets before tenants are injured.
Next article in the series:
The next article will continue these comparisons
- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content
Saturday, March 8, 2008
Eliminate the tax burden for 1031 exchanged real estate by participating in an oil and gas drilling investment
Use oil/gas drilling ventures to reduce or eliminate 1031 exchanged asset's eventual capital gains taxes.
Real estate investors who have deferred capital gains taxes on 1031 exchanged properties may be able to eliminate or drastically reduce capital gains taxes by participating in an oil and gas investment. By selling outside of using a 1031 exchange, the owner can reinvest the capital gains into an oil and gas investment since the full investment is deductible against active and passive income. Lets look at this in more detail.
First let’s provide a quick overview of what a 1031 exchange is.
This is an investment tool that allows usually real estate investors to sell income property without paying capital gains if those funds are invested in a equal or higher cost “like” type investment, usually another income property. However, the tax has only been deferred, not eliminated. Eventually, there will be a time when the sale of the final exchanged property will require payment of capital gains taxes based on the basis value of the original first exchanged property. There is potential for very significant capital gains in these properties resulting in equally significant taxes. There are ways to reduce or eliminate these taxes, but those methods usually require giving up some or all control of the asset or funds.
Consider an example.
As an example, assume an investor has $100,000 in capital gains in an income property and wishes to purchase a more significant income property. If the investor chooses to sell the first property without using a 1031 exchange, then a 15% capital gains tax is due for $15,000, leaving only $85,000 of funds for investment in the other property. If a 1031 exchange is used, then the full $100,000 of capital gains could be invested in the other property. This is a significant advantage while building wealth, but not an elimination of the eventual taxes due.
Exchanging real estate as "like type" investment into a domestic oil/gas drilling venture.
If an oil or gas well project is set up with investors having direct ownership interest, then the offering company may be able to accept 1031 exchange into the associated partnership shares. Oil and gas wells are considered “like” type investments allowing exchange of income properties into participation in the well. One thing to be aware of with any 1031 exchange is there are usually third party fees that can take several percentages of the funds in fees for facilitating the exchange. Therefore, even though you can do a 1031 exchange of real estate into a oil and gas investment, the fees and deferred tax issues may make it a better choice to sell the real estate outside of a 1031 exchange with the proceeds going into an oil and gas investment to get the associated tax benefits mentioned above.
It may make more sense to sell outside of 1031 into a domestic oil/gas drilling venture.
An example will illustrate the benefits of moving previously 1031 exchanged properties into an oil or gas well outside of using a 1031 exchange. For this example, 90% of the invested funds for each participation share in the partnership goes toward intangible drilling costs while the remaining 10% goes toward tangible costs. If the investor sells a property that has $100,000 in capital gains and invests the funds in an oil or gas well, then 90% of the $100,000, or $90,000 is removed from capital gains tax exposure the year of the sale. Only the remaining $10,000 is taxable at a 15% capital gains tax rate for a total tax due of $1,500 for the $100,000 in capital gains. However, the remaining 10% of each share cost can be deducted as tangible costs over seven years. Therefore the $1,500 in taxes is recouped over these seven years.
Bottom line...
As you can see, oil and gas well participation offers real estate investors with large capital gains to remove the associated tax burden for 1031 exchanged properties with capital gains.
- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content
Real estate investors who have deferred capital gains taxes on 1031 exchanged properties may be able to eliminate or drastically reduce capital gains taxes by participating in an oil and gas investment. By selling outside of using a 1031 exchange, the owner can reinvest the capital gains into an oil and gas investment since the full investment is deductible against active and passive income. Lets look at this in more detail.
First let’s provide a quick overview of what a 1031 exchange is.
This is an investment tool that allows usually real estate investors to sell income property without paying capital gains if those funds are invested in a equal or higher cost “like” type investment, usually another income property. However, the tax has only been deferred, not eliminated. Eventually, there will be a time when the sale of the final exchanged property will require payment of capital gains taxes based on the basis value of the original first exchanged property. There is potential for very significant capital gains in these properties resulting in equally significant taxes. There are ways to reduce or eliminate these taxes, but those methods usually require giving up some or all control of the asset or funds.
Consider an example.
As an example, assume an investor has $100,000 in capital gains in an income property and wishes to purchase a more significant income property. If the investor chooses to sell the first property without using a 1031 exchange, then a 15% capital gains tax is due for $15,000, leaving only $85,000 of funds for investment in the other property. If a 1031 exchange is used, then the full $100,000 of capital gains could be invested in the other property. This is a significant advantage while building wealth, but not an elimination of the eventual taxes due.
Exchanging real estate as "like type" investment into a domestic oil/gas drilling venture.
If an oil or gas well project is set up with investors having direct ownership interest, then the offering company may be able to accept 1031 exchange into the associated partnership shares. Oil and gas wells are considered “like” type investments allowing exchange of income properties into participation in the well. One thing to be aware of with any 1031 exchange is there are usually third party fees that can take several percentages of the funds in fees for facilitating the exchange. Therefore, even though you can do a 1031 exchange of real estate into a oil and gas investment, the fees and deferred tax issues may make it a better choice to sell the real estate outside of a 1031 exchange with the proceeds going into an oil and gas investment to get the associated tax benefits mentioned above.
It may make more sense to sell outside of 1031 into a domestic oil/gas drilling venture.
An example will illustrate the benefits of moving previously 1031 exchanged properties into an oil or gas well outside of using a 1031 exchange. For this example, 90% of the invested funds for each participation share in the partnership goes toward intangible drilling costs while the remaining 10% goes toward tangible costs. If the investor sells a property that has $100,000 in capital gains and invests the funds in an oil or gas well, then 90% of the $100,000, or $90,000 is removed from capital gains tax exposure the year of the sale. Only the remaining $10,000 is taxable at a 15% capital gains tax rate for a total tax due of $1,500 for the $100,000 in capital gains. However, the remaining 10% of each share cost can be deducted as tangible costs over seven years. Therefore the $1,500 in taxes is recouped over these seven years.
Bottom line...
As you can see, oil and gas well participation offers real estate investors with large capital gains to remove the associated tax burden for 1031 exchanged properties with capital gains.
- - - - - - - - - -
Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content
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