Glossary of Key Investment Terms

Federal income tax imposed on the profit realized when selling an asset. Long-term capital gains (assets held more than one year) are taxed at preferential rates (0%, 15%, or 20% depending on income). 1031 exchanges allow investors to defer these taxes by reinvesting proceeds into like-kind property.

The recapture of depreciation deductions taken on real property, taxed at 25% federal rate when the property is sold. In a 1031 exchange, depreciation recapture taxes cannot be deferred, though capital gains taxes are deferred if the exchange qualifies under Section 1031.

The postponement of tax liability on capital gains to a future tax year or until a taxable event occurs. A 1031 exchange is a primary tax deferral strategy for real estate investors, allowing them to defer capital gains taxes indefinitely through successive like-kind exchanges.

A neutral third party required to hold exchange funds during a 1031 transaction. The Qualified Intermediary must be unrelated to the taxpayer and holds the net sale proceeds from the relinquished property, ensuring the taxpayer does not take direct possession and maintaining the tax-deferred status of the exchange.

A designated economically distressed geographic area where investors can receive capital gains tax benefits on new investments. Capital gains invested in Opportunity Zone funds may defer taxes until 2026 or later, receive a basis step-up if held ten years, and potentially qualify for exclusion of gains on the Opportunity Zone investment if holding period requirements are met, subject to current tax law which may change.

The legal right to explore, extract, and sell minerals (including oil and natural gas) from subsurface land. Mineral rights can be separated from surface land rights, allowing owners to lease mineral rights to operators while retaining surface access, and receiving royalty payments from resource production.

A percentage ownership in oil and gas production revenues without operational responsibilities or capital contributions for drilling. Royalty interest holders receive a share of revenues from each barrel of oil or unit of gas produced, generally bearing no drilling risks or liabilities.

An ownership stake in an oil and gas property that carries both the right to revenues and the obligation to pay a proportionate share of drilling, completion, and operating costs. Working interest holders have greater upside potential than royalty interest holders but bear higher financial risk and operational involvement. Tax deductions may be available for intangible drilling costs (IDCs) and tangible equipment depreciation.

Investment securities representing royalty interests in oil and gas production operations. Oil and gas royalty investments provide investors with passive income from energy production without operational responsibilities, making them attractive alternative investments for accredited investors seeking diversification.

A tax deduction available to oil and gas investors recognizing the gradual exhaustion of energy reserves. The depletion allowance allows investors to deduct a portion of their investment each year as the resource is produced and sold, reducing taxable income from royalty or working interest distributions, subject to IRS limitations and individual tax circumstances. Consult a qualified tax professional for applicability to your situation.

Non-salvageable costs incurred during oil and gas drilling operations, including labor, supervision, fuel, and repairs. IDCs may be deducted immediately in the year incurred, providing significant tax benefits to oil and gas investors compared to the depreciation schedules applied to tangible drilling assets.

Oil and gas wells that have been drilled to target depth but have not yet undergone the completion process, including hydraulic fracturing, casing, and connection to production infrastructure. DUCs represent latent production capacity that operators can bring online relatively quickly when commodity prices or market conditions are favorable, often at lower cost and risk than drilling new wells from scratch.

A major sedimentary basin spanning western Texas and southeastern New Mexico, and one of the most prolific oil and gas producing regions in the world. The Permian Basin encompasses multiple geological formations: the Delaware Basin, Midland Basin, and Central Basin Platform. It is a primary focus area for U.S. energy production, exploration, and investment due to its vast proven reserves and established infrastructure.

An exchanger has 45 calendar days from the closing sale date of their property to formally identify a replacement property or properties, under IRC Revenue Code section 1031

An exchanger has 180 calendar days from the closing date of the property for sale to close on the exchanged or replacement property, under IRC Revenue Code section 1031

Properties that are the same nature or character, but can differ in quality or grade

Tax liability generated from violating IRS 1031 exchange guidelines in which investors must pay capital gains, depreciation recapture, federal, state, and local taxes at the time of the property’s sale

A Schedule K-1 is a tax document used to report a partner's, shareholder's, or investor's share of income, deductions, credits, and other tax items from a pass-through entity such as a partnership, S corporation, or LLC. Key characteristics include: - Pass-Through Reporting: Income and losses "pass through" to investors, who report them on their individual tax returns - Detail of Tax Items: Includes ordinary income, capital gains, dividends, interest, and other tax-relevant items - Investor Use: Each investor receives a K-1 reflecting their proportional ownership and share of taxable events Timing Considerations: - K-1s are typically issued after the entity closes its fiscal year, often several months after December 31 - Investors may not receive the K-1 until March, April, or later, depending on the entity's accounting and tax filing schedule - Late K-1 issuance can affect personal tax filing timelines and may require extensions

Adjusted Gross Income (AGI) is an individual's total gross income from all sources, minus specific adjustments allowed by the IRS, used to determine taxable income and eligibility for certain tax deductions and credits.

Earned Income is income received as compensation for personal work or services performed, including wages, salaries, tips, bonuses, and self-employment earnings.

Portfolio Income is income generated from investments in financial assets, such as stocks, bonds, mutual funds, and other securities, rather than from active business operations or employment.

Non-Passive/Earned-Like, But not Wages

An increase in value of an asset that generates a tax when the asset is sold on the gain above the cost basis

Targeted Annual Distribution % is the projected annual cash return that investors are expected to receive from an investment, expressed as a percentage of their initial capital contribution. This metric represents the sponsor's forward-looking estimate of recurring cash flow distributions during the hold period, typically sourced from operating income after expenses and debt service.

Targeted Annual Cash Flow is the projected total amount of cash an investment is expected to distribute to investors over the course of a year, based on anticipated net operating income and the investment's financial structure. This estimate represents the sponsor's forward-looking estimate of yearly income available after operating expenses, reserves, and debt service.

Targeted Monthly Cash Flow is the projected amount of cash an investment is expected to distribute to investors each month, based on anticipated net operating income and the investment's financial structure.

Targeted distribution frequency refers to how often investors are expected to receive cash flow payments, based on the sponsor’s projections.

Annual Cash Flow Divided by Initial Investment. This calculation does not include any growth or decline in the value of the asset.

Preferred Return refers to the priority claim on an investment’s profits. It is a threshold that must be met and paid to investors before the Sponsor (the manager of the project) can receive any "carried interest" or performance-based "promote" fees.

Annual Cash Flow Divided by the value of the investment.

Actual IRR is the realized rate of return earned on an investment based on actual cash flows that occurred over time, including the final exit value.

Targeted IRR (Internal Rate of Return) in a Delaware Statutory Trust (DST) investment is the sponsor’s projected annualized return to investors over the expected holding period, assuming the investment performs as planned and the property is sold at projected values.

Return of capital (ROC) in a private placement investment refers to distributions paid to investors that are not earnings or profits, but instead represent a partial repayment of the investor’s original invested principal.

Return of Principal (ROP) refers to the distribution of an investor's original capital contribution in an investment. In passive income strategies such as DSTs and private placements, distributions may be classified as return of principal, representing a non-taxable return of the investor's initial investment rather than investment income. Return of principal distributions reduce the investor's cost basis in the investment and are not subject to ordinary income tax in the year received. This tax treatment allows investors to defer taxation on growth and potentially qualify remaining gains for long-term capital gains treatment upon final liquidation or sale of the investment.

Estimated Total Return represents the projected overall return an investor may receive from an investment over its entire hold period, including both income distributions and capital appreciation.

Accelerated Depreciation is a tax strategy that allows an investor to depreciate an asset at a faster rate than the standard straight-line method, front-loading depreciation deductions to earlier years of the asset's useful life. This approach increases non-cash expenses in the near term, reducing taxable income and enhancing early cash flow.

Depreciation is an accounting method that allocates the cost of a tangible asset over its useful life, reflecting its gradual wear, deterioration, or obsolescence. In real estate and private investments, depreciation provides investors with a non-cash expense that can reduce taxable income, enhancing after-tax cash flow.

Year end tax report provided to investors in DSTs.

Leverage refers to the use of borrowed capital (debt) to finance the acquisition or operation of an investment with the goal of enhancing potential returns. By applying leverage, investors can control a larger asset with a smaller amount of equity, potentially increasing both cash flow and overall investment performance.

Debt is a form of financing in which an investor or lender provides capital to a borrower in exchange for a contractual obligation to repay the principal amount plus interest.