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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.
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Showing posts with label tax writeoff. Show all posts
Showing posts with label tax writeoff. Show all posts
Saturday, March 8, 2008
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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