One of my new favorite clients, Linda, asks the following question:

Q: Hi Tom, When investing w/Reef Gas & Oil outside an IRA as a general partner is additional asset protection necessary? (LLC) Can the tax benefits still be realized?

A: In order to receive the tax benefits in the first two years of investment in an oil and gas development program such as that offered by Reef, you must invest individually and not through an LLC or other entity. The developer, such as Reef, should carry sufficient liability insurance to cover any liabilities that occur. Of course, we have seen what is happening in the Gulf with BP and no amount of insurance can cover that type of catastrophe.

So, you are left with the decision to be someone exposed to a huge catastrophe that is unlikely to occur (BP is really the first of its kind) and get the up-front tax deduction or invest through an LLC and have the losses treated as passive losses that can only be used against passive income.

Thanks, Linda, for the excellent question. Since the Rich Dad Gold vs. Dollar seminar, this has been a popular topic. I am a big fan of oil and gas investing and have been doing this myself for many many years. Be sure to do your due diligence and remember that you really can lose all of your investment when you invest in oil and gas - even a development program where the reserves are proven.

Warmest regards,

Tom