Oil & Gas
Investment Services
Royalty ownership and working interest drilling programs represent two distinct strategies for income, tax advantages, and portfolio diversification for accredited investors.
Energy investments with specific characteristics
Oil and gas investments offer accredited investors access to the energy sector through two primary structures: royalty interests and working interests. Each approach carries a unique combination of income potential, tax treatment, and risk profile.
Tangible Wealth Solutions helps investors evaluate which path aligns with their financial goals.
Royalty Interests: Passive Ownership
Qualify as like-kind real property under IRS Revenue Ruling 68-331, making them eligible for 1031 exchange strategies.
Working Interests: Active Participation
May provide significant tax deductions through intangible drilling costs (IDCs), often representing 60–80% of total well costs.
Accredited Investors Only
Oil and gas investments are private placements available exclusively to accredited investors. Full risk disclosure review is required.
Oil and gas investments are speculative and involve significant risk. These are illiquid private placements for accredited investors only. There is no guarantee of returns. Consult your financial and tax advisor.
Overview
Two distinct paths in oil & gas investing
Tangible Wealth Solutions offers two primary approaches: royalty interests and working interests, each with different risk profiles, tax implications, and income characteristics.
A legacy asset class with modern portfolio applications
Oil and gas royalty investment has been a proven asset class since the early 1900s. Owners receive the potential for monthly income from oil and gas companies who drill and operate wells on their property without personally investing in capital equipment or field operations.
Since royalty interest holders are not billed for exploration, drilling, or operating expenses, they also do not share in the risks or liabilities associated with those operations. In 1968, the IRS issued Revenue Ruling 68-331 confirming that royalty interests qualify as like-kind property for 1031 exchanges, a treatment reaffirmed by decades of court rulings.
Royalty owners have the potential to receive 12 checks (or direct deposits) each year and 1099 tax documents directly from the operators. Up to 15% of royalty income may qualify for the percentage depletion allowance, subject to IRS limitations including income thresholds and production volume caps. Individual eligibility varies.
Oil and gas royalties involve significant risks including pricing and production variability. Past performance does not indicate future results. See full disclosures below.
Direct Deed & Title Ownership
Recorded ownership on a county level, same as traditional real estate.
Potential Monthly Income
Royalty owners may receive up to 12 periodic payments annually, though distributions are not guaranteed and depend on production levels and market conditions.
No Capital Calls or Operating Expenses
Owners do not fund drilling, exploration, or day-to-day well operations.
1031 Exchange Eligible
Royalty interests qualify as like-kind real property under IRS Revenue Ruling 68-331.
Six key advantages of royalty ownership
Transaction Size Flexibility
Royalty ownership is a 1031 exchange alternative that allows you to customize your investment level. Whether you need $100,000 or $5,000,000 worth of replacement property, the interest can be carved to fit your exchange.
Superior Cash Flow Potential
Royalty properties may offer a different risk/return profile compared to traditional real estate investments. Past performance is not indicative of future results.
No Capital Calls
Royalty owners do not have the risk of having to make capital calls, unlike investors in oil and gas drilling programs or tenant-in-common real estate.
Investor Independence
Owners of undivided interests in royalty properties are not locked into an ownership structure linked to other investors. Each owner is free to exercise control over holding period and exit strategy.
Tax Savings
Up to 15% of royalty income may qualify for the percentage depletion allowance, subject to IRS limitations including income thresholds and production volume caps. Individual eligibility varies.
Portfolio Diversification
Cash flow from multiple producing wells and undeveloped acreage for potential future production can alleviate the risk of owning a single property or being overconcentrated in traditional real estate.
Active participation with significant tax advantages
A working interest represents direct ownership in oil and gas drilling operations. Unlike royalty interest holders, working interest investors participate in the costs and revenues of exploration and production. This active involvement may provide access to certain tax deductions, subject to individual tax circumstances and applicable regulations, most notably through Intangible Drilling Cost (IDC) deductions.
IDCs typically represent 60–80% of the total cost of drilling a well and may include labor, chemicals, mud, grease, and other materials used in drilling that have no salvage value. Under current tax law, these costs may be deductible in the year they are incurred, potentially providing significant tax relief in the year of investment.
Tangible drilling costs, such as physical equipment like casing, tubing, and wellheads, are generally depreciated over a 7-year schedule. Together, IDC deductions and tangible cost depreciation may offset a portion of investment income, subject to passive activity loss rules, AMT limitations, and individual tax circumstances. Consult your tax advisor.
Working interest investments are speculative and carry higher risk than royalty interests. Investors may be liable for capital calls and operating expenses. Political, geological, and market risks may eliminate all returns. These are illiquid private placements for accredited investors only.
Intangible Drilling Costs (IDCs)
Often 60–80% of total well costs, IDCs may be deductible in the year incurred. This includes labor, chemicals, and non-salvageable materials used in drilling operations.
Tangible Equipment Depreciation
Physical drilling equipment such as casing, tubing, and wellheads may be depreciated over a 7-year schedule, providing ongoing tax benefits beyond the initial year.
Active Participation Income Potential
Any working interest income may be classified as active income for tax purposes, potentially allowing deductions to offset other active income, an advantage not available with most passive investments.
Royalties vs. working interests at a glance
Understanding the key differences helps investors align their oil and gas strategy with personal financial goals, risk tolerance, and tax situation.
| Royalty Interests | Working Interests | |
|---|---|---|
| Ownership Type | Passive: deed recorded at county level | Active (GP) or Passive (LP) |
| Capital Calls | None: no obligation for additional capital | Possible: investors may be called for additional funds |
| Operating Expenses | None: borne entirely by operator | Shared: proportional to ownership stake (IDCs) |
| Income Type | Portfolio (ordinary) income | May qualify as active income |
| Key Tax Benefit | 15% depletion allowance on royalty income | Intangible Drilling Cost (IDC) deductions; 15% depletion allowance |
| 1031 Exchange | Eligible under IRS Revenue Ruling 68-331 | Generally not eligible for 1031 exchange |
| Risk Level | Lower relative risk within oil & gas | Higher risk: geological, operational, and market exposure |
| Liquidity | Generally illiquid; secondary market demand in 90–120 days | Generally illiquid; tied to program life cycle |
| Income Frequency | Potential for 12 monthly distributions per year | Varies by program structure and production |
Explore Alternatives
Oil and gas investments are often part of a broader alternative investment strategy. Explore other approaches that may help diversify your portfolio and pursue tax advantages.