Capital Gains eCourse > Lesson 5
3 – Oil and Gas Deals
Lesson 5 of 15 · About a 3-minute read · By Lane Kawaoka, PE · Updated November 2026 · Course home
Short answer
Oil and gas working interests can create large first-year deductions from intangible drilling costs, which some investors pair with a year of big gains. Whether those deductions offset non-passive income depends on how you own the interest, so confirm with your CPA.
Understanding the Risks and Tax Benefits of Oil & Gas Investments
In these videos, we delve into the tax-saving potential of oil and gas investments, propelled by incentives from the United States IRS to reduce reliance on foreign oil.
These investments differ from real estate deals by allowing deductions that offset ordinary income as opposed to just passive income. However, we also caution about the inherent risks, including unreliable operators and the controversial nature of techniques like fracking. Emphasizing a holistic approach, we stress the importance of thorough research and not letting tax benefits overshadow the overall investment quality.
Lesson summary
Oil and gas is one of the few investments where the tax deductions may offset ordinary income, not just passive income. Whether they do depends on how you own the investment: a working interest is treated differently from a limited partner interest. The first video explains where these deductions come from: the tax code includes incentives meant to encourage domestic energy production. I also cover the downsides, including operators who are hard to trust and the controversy around methods like fracking. The second video covers due diligence on oil and gas deals. My main point across both: judge the investment first and the tax benefit second, because a deduction doesn’t help if you lose the money. These deals carry high risk and are usually open only to accredited investors. Talk with your CPA about how your ownership structure affects the deductions.
This is educational content, not tax, legal, or investment advice. We are not attorneys, CPAs, or financial planners. Please let us know if you need a referral to a CPA, lawyer, or other vendor here.
Go deeper on oil and gas
This lesson covers the capital gains angle. For the full picture, take our free Oil & Gas Investing eCourse. These lessons pair best with this one:
- The tax benefits: intangible drilling costs, depletion, and why ownership structure decides who can use the deductions
- Structure is everything: working interests versus royalties and limited partnerships
- Risks and the oil market: what can go wrong and how prices move
- How to vet a deal: questions to ask any sponsor before you invest
Key takeaways
- Intangible drilling costs are often the largest share of a well’s cost.
- Working-interest ownership can make losses non-passive; limited partnership interests are usually passive.
- Production, prices and the operator drive results, so the tax benefit is only one part of the decision.
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