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“You need a tax deduction”
Many income earners hear that phrase a lot. It makes good financial sense to find ways of reducing our taxes while still paying our fair share to maintain this wonderful country we are blessed to live in. Some advisors recommend buying a home for the tax deduction of interest on the loan. However, they should have a full understanding of the client’s financial status to make this statement only if it truly fits within his/her financial plan. Unfortunately, many other people hear this advice and feel it is a global statement for everyone.
Understanding the deduction of interest on a home loan:
The ability to deduct the interest paid on a home loan is one of the few deductions used by the ordinary wage earner. A few years back, they were able to deduct interest on credit cards and other expenses. No longer. Therefore, they try to buy the largest home affordable in order to have the most interest to deduct yearly. Once the original loan gets paid down to where most of the monthly payment toes toward principle rather than toward interest, they may get a new refinance loan or a 2nd on their home to have cash for “investing” and higher yearly interest to deduct. They stay in debt on their home to the maximum level possible for this tax deduction.
What does it really cost to deduct the interest on a home?
What these people may not realize is that they are paying out over twice the money than the benefits they are receiving from the deduction of interest. The following example will help illustrate this further.
Very simplified example:
Joe earns a yearly salary that puts him in a 40% combined state and federal tax bracket. Joe buys a house with a total of $25,000 interest the first year. This provides a $25,000 x 40% or $10,000 tax benefit. However, note that Joe spent a total of $25,000 to get this $10,000 benefit, or 1 ½ times more than the benefit.
If Joe was in a lower total bracket of 25%, then the benefit would only be $25,000 x 25% or a $6,250 benefit. In this case it cost Joe $25,000 for a $6,250 benefit or four times as much.
These examples are very simplified and don’t take into account all of the tax issues associated with a real situation. However, they do illustrate the point that Joe is spending much more money than he receives from reduced taxes. In addition, over a 30 year loan, the extra money spent is significant.
Must look at each person’s situation to determine what makes sense.
For some people, renting may actually make more sense financially than owning. For others, owning a home is the best option. However, care must be taken to buy a home that fits within an appropriate financial plan for that person. Don’t try to buy the largest home or get the largest mortgage just to have a big interest deduction. There are many other deductible investments you can make that will reduce taxes while providing income. In this way, the money spent actually generates increased income rather than extra expense. Also, consider the benefits of having your home paid off with the funds that once went toward the mortgage payment now available for investing in additional income generating investments. There are investments such as oil and gas drilling ventures that provide a 100% deduction of all invested funds against all income types while not counting in alternative minimum tax (AMT) income. Other tax advantaged investments include government bonds. In these ways, the investor can reduce taxes while increasing income without adding debt.
Summary:
The main point here is not to buy the largest house or maintain the largest mortgage for the tax deduction alone. Be sure to carefully consider your long term financial plan to determine what level of investment in a home best fits within that strategy. Work with a financial planner as needed during this process.
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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/. 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.
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Showing posts with label tax write-off. Show all posts
Showing posts with label tax write-off. Show all posts
Sunday, September 7, 2008
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.
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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
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
Full tax deduction against both active and passive income for all invested funds in oil and gas drilling ventures
All funds invested in a properly structured domestic oil/gas drilling venture are fully tax deductible.
Funds invested in a oil and gas drilling venture go toward paying two types of tax deductible costs to drill and put a well online: intangible and tangible costs. Intangible Drilling Costs (IDCs) can be fully deducted the first year a well is drilled and is typically 65 - 80% of the funds invested to drill and put a well in production. Tangible costs can be deducted over seven years. Deducting both intangible and tangible costs against both ative and passive income allows the investor to significantly save on income taxes by deducting the full amount invested in a oil and gas drilling venture.
What is included in Intangible Drilling Costs (IDC)?
IDC includes those items that do not stay with the well once it is put into production. These costs include fees paid to the driller, operator, sales agents, lawyers, producers, accountant, and others. It also includes other non-depreiable costs such as fuel, mud (a thick liquid used to lubricate the drill bit and to bring drilled particles to the surface), etc.
What is included in Tangible Drilling Costs (TDC)?
TDC includes those items that continue with the well when it is in production such as the cost of a pump for the well, pipelines to collect the oil and gas, storage tanks to store the oil and gas, the road up to the well and associated asphalt covering if used, etc.
Understanding these deductions from an example.
Let’s look at an example to see how these tax advantages come into play. Assume you invest $100,000 into the partnership where 80% of your investment goes toward intangible drilling costs. Once in production, the well pays you a net income of $10,000 per month. Also, your combined State and Federal tax rate is 50%. First we will look at what portion of your total investment will be deductible. Doing the math, since 80% of your investment went to pay intangible drilling costs, you can deduct $80,000 of your investment the first year against both active and passive income. That means you have saved $40,000 in taxes which would have been paid on $80,000 income at the 50% tax bracket. The remaining $20,000 of your invested funds go toward tangible costs and can be fully deducted over seven years against both active and passive income. The end result is the full $100,000 invested in the well is completely deducted against all income types.
Again, only investment in domestic oil/gas drilling ventures provide full writeoff of all invested funds against all income types.
No other investment vehicle besides an oil and gas drilling venture gives you such large deductions in the first year with the remainder over the seven years to where all of the invested funds are eventually deducted.
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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
Funds invested in a oil and gas drilling venture go toward paying two types of tax deductible costs to drill and put a well online: intangible and tangible costs. Intangible Drilling Costs (IDCs) can be fully deducted the first year a well is drilled and is typically 65 - 80% of the funds invested to drill and put a well in production. Tangible costs can be deducted over seven years. Deducting both intangible and tangible costs against both ative and passive income allows the investor to significantly save on income taxes by deducting the full amount invested in a oil and gas drilling venture.
What is included in Intangible Drilling Costs (IDC)?
IDC includes those items that do not stay with the well once it is put into production. These costs include fees paid to the driller, operator, sales agents, lawyers, producers, accountant, and others. It also includes other non-depreiable costs such as fuel, mud (a thick liquid used to lubricate the drill bit and to bring drilled particles to the surface), etc.
What is included in Tangible Drilling Costs (TDC)?
TDC includes those items that continue with the well when it is in production such as the cost of a pump for the well, pipelines to collect the oil and gas, storage tanks to store the oil and gas, the road up to the well and associated asphalt covering if used, etc.
Understanding these deductions from an example.
Let’s look at an example to see how these tax advantages come into play. Assume you invest $100,000 into the partnership where 80% of your investment goes toward intangible drilling costs. Once in production, the well pays you a net income of $10,000 per month. Also, your combined State and Federal tax rate is 50%. First we will look at what portion of your total investment will be deductible. Doing the math, since 80% of your investment went to pay intangible drilling costs, you can deduct $80,000 of your investment the first year against both active and passive income. That means you have saved $40,000 in taxes which would have been paid on $80,000 income at the 50% tax bracket. The remaining $20,000 of your invested funds go toward tangible costs and can be fully deducted over seven years against both active and passive income. The end result is the full $100,000 invested in the well is completely deducted against all income types.
Again, only investment in domestic oil/gas drilling ventures provide full writeoff of all invested funds against all income types.
No other investment vehicle besides an oil and gas drilling venture gives you such large deductions in the first year with the remainder over the seven years to where all of the invested funds are eventually deducted.
- - - - - - - - - -
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
Friday, March 7, 2008
Reducing your Alternative Minimum Tax (AMT) by investment in an oil and gas drilling venture
You can reduce up to 40% of your Alternative Minimum Tax (AMT) income by investing in a domestic Oil and Gas (O&G) drilling venture and the resulting income generated from the wells will not put you in an AMT situation. These are two unique benefits to independent oil and gas producer ventures/investment opportunities that no other investments give if you are in an AMT situation.
As stated, up to 40% of your alternative minimum tax income can be reduced a dollar for every invested dollar in an Oil or gas drilling venture. As an example, assume an investor has $300,000 in alternative minimum tax income. This investor can use up to 40% of this $300,000, or $120,000, in intangible drilling costs deductions. Intangible Drilling Costs (IDC) deductions are excluded as tax preference items for small producers and associated investors. Also, by electing to write off IDCs over five years you can increase the limit of your deductions without affecting AMT.
The bottom line is oil and gas well participation is a vehicle to reduce up to 40% of your alternative minimum tax income while the resulting yearly income will not put you in a AMT situation. For more information, you can read Page 6 of IRS Instructions for Form 6251 / Line 25 (2007 version). You can click on the title for the 2007 instructions that explain line 25 at the time of this posting.
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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.
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