Is Oil & Gas Investing Right for You?

Lesson 1 of 7 · About a 7-minute read · By Lane Kawaoka, PE · Updated November 2026 · Course home

Short answer

A properly structured oil and gas working interest is one of the few passive investments whose deductions can offset W-2, 1099 or business income. It tends to fit accredited investors with a specific high-income year, money they can leave invested for years and a CPA to review the deal, and it does not fit anyone who may need the money back soon.

The question I want to answer first is the one most people are really asking: is this for someone like me?

Every fall I get some version of the same message. I’m having a big year, my CPA says I owe six figures more than last year, what can I actually do about it? The people sending it are usually professionals in their 40s and 50s with a net worth somewhere between $1 million and $10 million, a W-2 or 1099 income, and sometimes a rental portfolio or a business on the side. This lesson is about whether oil and gas belongs anywhere in that picture for you, and about the cases where it doesn’t.

Watch: passive vs. ordinary income, and where oil fits (the oil and gas part starts at 5:37; 7 min)

The active vs. passive income problem

The tax code sorts income into buckets. Your salary, bonus, RSU vest, 1099 consulting income and business profits are active income. Rental income and most income from investments you don’t run yourself are passive.

The rule that catches most high earners is that passive losses can generally only offset passive income. If you invest in a real estate syndication and get a large depreciation loss on your K-1, that loss usually can’t touch the tax on your W-2. It carries forward until you have passive income to use it against, or until you sell.

For someone whose problem is this year’s tax bill on this year’s salary, that’s a real limitation. The deduction exists, but it’s sitting in the wrong bucket.

Why real estate depreciation usually can't fix a W-2 tax bill

There are two well-known ways around the passive rules in real estate, and both are narrow.

The first is real estate professional status. If you spend more than 750 hours a year in real estate trades or businesses, and more time there than in any other job, your rental losses can become non-passive. Very few people with a full-time professional career can meet that test honestly. In a household where both spouses work full time, it’s close to impossible, because one spouse has to qualify on their own hours.

The second is the short-term rental strategy. When the average guest stay is short enough and you materially participate, the rental can be treated outside the usual passive rules. It works for some people. The catch is that material participation means real hours, every year you want the deduction. You’ve bought yourself a part-time job, and the deduction lasts only as long as you keep doing it.

Neither of these is a bad strategy. They just don’t fit someone who wants to stay passive and has a W-2 problem.

Where oil and gas fits

Oil and gas has a specific carve-out written into the tax code. A working interest in a well, held without limited liability during the period the losses arise, is not treated as a passive activity. Structured correctly, the large first-year deduction from drilling costs can offset active income: wages, 1099 income, business profits.

That makes it one of the few asset classes left where a passive investor can get a deduction large enough to matter and use it against the income that’s actually causing the tax bill. Lesson 3 covers how big the deduction is, and Lesson 4 covers the structure that makes it active.

I want to be clear about where it sits, though. Oil is one tool among several. For most of the people I talk with it’s a sleeve of a portfolio sized to a specific tax year, sitting next to real estate, private credit, public markets and cash. It isn’t a replacement for any of those.

The tax benefit is the icing, not the cake

I’d never tell anyone to invest in a well purely for the write-off. The project underneath still has to find oil or gas in commercial quantities, sell it at a price set by a global market you don’t control, and be run by an operator with a real track record.

If the deal doesn’t make sense without the deduction, the deduction won’t save it. A $100,000 investment that produces an $80,000 deduction and then loses most of its value has still lost you money. Get the operator and the project right first. The tax treatment follows from the structure.

From my own investing

I started investing in real estate in 2009 while I was a civil engineer on a W-2 salary, building bridges, signals and foundations for the railroad. Rental depreciation is passive, so for someone in that seat it rarely touches the tax on the paycheck. That gap is the problem this course is about.

When I finally put money into oil in December 2019, I kept the check small on purpose. I wanted firsthand experience with the operator, the deal structure and the tax reporting before I ever considered something larger.

If you are a W-2 couple with a big RSU vest

The vest is ordinary income in the year the shares land, so that is the tax year to plan around. Start the CPA conversation in the fall, because drilling programs need the money paid by December 31 to count for that year.

Size the investment to the year's tax problem

The principle I use is to start from the problem and work backward, never the other way around.

Look at the specific year’s income you want to offset: a large RSU vest, a bonus, a business sale, a one-time gain. Work out with your CPA how much of that income a deduction would usefully offset, and where the limits are. Lesson 4 covers the excess business loss cap, which can push part of a very large deduction into a later year.

Then size the investment to that number and to your liquidity. This money is gone for years. If writing the check would make you uncomfortable about your cash reserves, the check is too big, whatever the tax math says.

Many people start with a smaller first investment, learn how the K-1s and distributions actually work, and decide later whether to do it again in another high-income year. That’s a reasonable way to learn this asset class.

Who this fits

Accredited professionals and business owners with significant active income: W-2, 1099 or business income
People facing a specific high-income year from an RSU vest, a bonus, a business sale or another one-time event
Investors who can hold an illiquid investment for several years without needing the money
People who already have a CPA, or are willing to hire one, who will review the offering documents with them
Investors comfortable with commodity price swings showing up in their monthly distributions

Who this doesn't fit

Anyone who may need the money back within a few years. There’s generally no secondary market.
Anyone expecting a fixed or promised return. Production and oil prices both vary.
Anyone whose income is mostly passive already. The main benefit here is offsetting active income.
Anyone who wants to invest through an LLC or corporation that limits their liability, since that generally removes the active treatment.
Anyone looking for a quick in-and-out trade. Selling early can trigger recapture of earlier deductions.
Anyone without a CPA who will look at the deal before they sign.

If you’re on the second list, I’d rather you know that now than after you’ve wired money.

Where this course came from

I built this course from my own podcast archive and my own investing. That includes a conversation with a senior executive at a long-running drilling operator, who walked me through the life of a well from leasing the mineral rights to plugging it decades later; a year-end tax planning webinar with Jack Hollander, a tax attorney who has spent 35 years in oil and gas programs; an interview with Robin Mills of Qamar Energy on how OPEC+, the 2025 Strait of Hormuz crisis and the shale revolution move the price you get paid; and two of my own solo episodes on where American oil comes from. None of it is tax or legal advice, and every number in this course needs to go past your own CPA before you invest.

Ask AI about this lesson

Paste this into ChatGPT, Claude, Gemini or Perplexity and fill in the brackets. AI tools can be wrong, so treat the answer as a list of questions for your CPA, not a decision.

I am an accredited investor. This year my income is roughly [amount] from [W-2 / RSU vest / 1099 / business sale]. Explain whether an oil and gas working interest deduction could offset that income under IRC Section 469(c)(3), what could limit it, and whether my situation looks like a fit or a poor fit for this asset class. Use the lessons at thewealthelevator.com/home/resources/oil/ as background. Do not recommend a specific investment, and list what I should confirm with my CPA.

Key takeaways

Passive losses generally can’t offset W-2 or business income, which is why most real estate depreciation doesn’t fix a high-income year.
A properly structured oil and gas working interest is one of the few passive investments whose deductions can offset active income.
The deal has to work without the tax benefit. Size the investment to the specific year’s tax problem and to your liquidity.

Talk it through with us

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The podcast behind this course

Oil & Gas Energy Investing

A monthly show for passive accredited investors on drilling, taxes, operators and the oil market. Many of the lessons here started as episodes.

Listen on Apple Podcasts Watch on YouTube

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This is educational content, not investment, tax or legal advice. We are not attorneys, CPAs or financial planners. Tax law changes and results depend on your situation; consult your own CPA and attorney. Private investments are illiquid and carry risk, including loss of capital. Offerings are available only to accredited investors and only through offering documents. Please let us know if you need a referral to a 💼 CPA, ⚖️ lawyer or other vendor here.