Most physicians who’ve built wealth outside medicine end up in a similar place. They’ve got real estate exposure, maybe some index funds, a few syndications. And then they start asking a question that doesn’t have an easy answer: what else belongs here?
That’s where I was several years ago. I was looking for assets that genuinely behaved differently from what I already owned. Things that didn’t move in lockstep with the stock market, didn’t depend on the same interest rate cycle as real estate, and could produce consistent income in conditions where my other assets were under pressure.
Oil and gas kept coming up in that search.
My first reaction was skepticism. It felt opaque. You can’t look up comparable prices the way you can in real estate. There’s no Zillow for mineral rights. The people who do it well have been doing it for decades and they’re not always easy to find or evaluate.
I’ve spent a lot of time since then learning the space. Here’s what I found worth understanding before making any decisions.
Disclaimer: This article is for informational and educational purposes only and does not constitute financial, legal, or investment advice. Any investment involves risk, and you should consult your financial advisor, attorney, or CPA before making any investment decisions. Past performance is not indicative of future results. The author and associated entities disclaim any liability for loss incurred as a result of the use of this material or its content.
Why the IRS Treats Oil and Gas Like Real Estate (And Why That Matters)
The reason oil and gas feels foreign to most investors is that nothing about it looks familiar. There’s no address. No building. You can’t drive past your asset or show it to anyone on a map.
But the framing that made it click for me was simpler than I expected.
In the United States, real estate is actually divided into three distinct categories: air rights above the surface, surface rights (the land itself), and mineral rights covering everything below it. You can buy, sell, or lease any of them independently. Most people just never encounter that third category.
The IRS treats mineral rights the same way it treats traditional real estate. There’s depreciation. There’s depletion. There are write-offs. The legal structure and tax treatment are fundamentally parallel. The main difference is that you can’t go see what you own. It’s two miles underground, not eight stories above it.
That’s the thing that makes this asset class hard to get comfortable with. It requires a different kind of due diligence than what physicians are used to. But the underlying framework is more familiar than it looks.
Mineral Rights vs. Working Interest: The Two Main Ways to Invest
Like real estate, oil and gas investing isn’t one thing. There are two primary entry points for accredited investors, and they serve different purposes.
Mineral rights ownership is the more passive approach. You’re buying the rights to resources below a specific piece of land. If an oil company is already leasing and drilling on that land, you receive a royalty on production. You don’t fund the drilling. You carry no operational costs or liability. You receive a percentage of revenue for as long as the wells produce, which can run 25 to 100 years.
Think of it as the analog to buying raw land in real estate. The cash flow starts when someone else develops it.
Working interest is the more active participation. You invest in the drilling of a specific well and take on a proportional share of both costs and production. The upside is significant: current tax law allows a 100% write-off of working interest investments against ordinary W-2 income in the year you invest.
One nuance physicians should know: most passive investment losses can’t offset W-2 income because of passive activity rules. Oil and gas working interest is a statutory exception. The IRS treats it as active income, which is why the deduction is available in a way it simply isn’t for most alternative assets.
For a physician earning $800,000 annually at a 37% federal rate, a $200,000 working interest investment can substantially reduce taxable income in year one. The trade-off is commodity price risk and execution risk on the drilling itself.
Both approaches have legitimate places in a portfolio. Which one fits depends on your income, tax situation, and how much complexity you’re willing to take on.
The Tax Math Physicians Often Miss
The working interest write-off is where most high earners get interested. But there’s a less-discussed play worth knowing about.
If you hold mineral rights inside a self-directed IRA, you can use them as part of a Roth conversion strategy. When minerals are held inside that structure, the depletion allowance reduces the taxable basis on the conversion, meaning you pay taxes on significantly less than the converted amount. Depending on the deal structure, this can reduce the taxable amount on a traditional-to-Roth conversion by 65% to 80%.
For physicians with substantial IRA balances approaching required minimum distribution age, that math deserves a serious conversation with a CPA. Working the last years of a 40-year career to fund a tax bill you could have reduced with better tax planning is a painful outcome.
Additionally, up to 15% of gross income from oil and gas production is exempt from federal income tax through the depletion allowance. That’s a structural advantage built into the tax code, not a loophole or gray area. These are among the tax benefits that make working interest ownership worth understanding in detail.
None of these are obscure strategies. They’re just rarely explained in a context relevant to physicians.
How to Evaluate an Oil and Gas Operator (And What Red Flags Look Like)
This is the part that matters most.
A meaningful percentage of operators in the oil and gas space are not people you want to invest with. The business can be structured to benefit the operator even when investors never see a real return. Hidden fees, vague reporting, deals that look attractive on paper but carry so many cost layers that a successful well barely breaks even for the investor.
Troy Eckard, who has spent over four decades in the oil and gas business, described it this way when I had him on the podcast:
“The bad actors stack the fees so high that even if you hit a good well, you’re never going to get payout. And you don’t know that because you’re not an expert in oil and gas.”
This is where real estate due diligence translates directly. You’ve learned to evaluate a real estate syndication sponsor by their track record, fee structure, transparency, and alignment of incentives. Oil and gas requires exactly the same rigor.
You’re looking for operators who will show you precisely what they own, what they’ve returned to investors historically, and exactly how they make money on a deal. Engineers and geologists on staff.
A disciplined acquisition approach. A good operator doesn’t guess where oil is. They only buy minerals where production is already happening or where a well-capitalized company is actively permitted to drill.
One structural note worth understanding: direct ownership through an aggregated model is typically how individual investors access institutional-quality assets in this space. Middle-market oil and gas deals have largely disappeared over the last decade.
It’s either large-scale institutional transactions or very small operators. Pooling capital with other accredited investors is often the only realistic path to the tier of assets where the economics actually work.
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How Much Should Physicians Allocate to Oil and Gas?
Oil and gas isn’t right for everyone. The learning curve is real. The asset class is harder to research than real estate, and it requires trusting an operator you can’t fully evaluate until you’ve built a track record with them.
What it offers in return is something most alternatives don’t: genuine non-correlation with public markets, meaningful tax advantages, and long-duration passive income from a single investment decision.
Most physicians I know who are exploring this start with a position somewhere between $50,000 and $200,000, with the intention of learning the asset class before scaling. Education before capital is the right sequence here.
Here’s the honest reframe on why more people don’t pursue this.
Most of us were trained on a three-bucket framework: stocks, bonds, real estate. Oil and gas doesn’t fit cleanly into any of them. It doesn’t trade on an exchange. There’s no price feed. You can’t look it up in the Wall Street Journal or run comps on Zillow.
That obscurity is probably why over 22 million millionaires exist in the United States and fewer than 500,000 have any oil and gas ownership at all. The asset isn’t inaccessible. Most people just never get past the first question of how it works.
If you want to understand the mechanics before making any decisions, Eckard recently launched OilClarity.com, a free educational resource built specifically for investors who are starting from scratch. Worth going through before you take any next step.
Disclosure: This is not a paid or sponsored post. Eckard Enterprises is a partner of Passive Income MD. Nothing here constitutes financial or investment advice. Oil and gas investments carry significant risk, including loss of principal. Consult your own CPA or financial advisor before making any investment decision.
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Peter Kim, MD is the founder of Passive Income MD, the creator of Passive Real Estate Academy, and offers weekly education through his Monday podcast, the Passive Income MD Podcast. Join our community at the Passive Income Doc Facebook Group.
Disclaimer: I am not a CPA, attorney, or financial advisor. The information in this post is for educational purposes only and should not be construed as tax, legal, or financial advice. Please consult a qualified professional about your specific situation before making any decisions.
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