Essential Insights on 1031 Exchanges in California

The Growing Trend: 1031 Exchanges as a Popular Exit Strategy for California Landlords

If you're a landlord in California contemplating the sale of your rental property, rest assured that you're not alone in considering this decision. Numerous factors have contributed to an increasing number of landlords opting to sell their properties in 2023. California currently leads the nation in outward migration, and the state's landlord-tenant laws are increasingly perceived as unfavorable towards property owners.

One significant incentive driving this trend is California's high capital gains tax, which currently holds the distinction of being the highest in the nation. However, this tax burden is no longer deterring landlords from selling their investment properties, thanks to the rising popularity of tax-deferred exit strategies such as the 1031 Exchange. With a 1031 Exchange, landlords can sell their investment properties without incurring immediate tax liabilities, thereby positioning themselves better to attempt to achieve their financial and lifestyle objectives through reinvestment.

These influential factors, coupled with potential unfavorable economic conditions and anticipated changes in tax laws, are prompting California landlords to seriously consider selling their investment properties sooner rather than later. Let's delve into the primary drivers fueling this emerging trend:

California's Outward Migration: Understanding the Economic Challenges

California, once regarded as a prime destination for investment property, is experiencing a significant shift in population dynamics. Historically, the state has been at the forefront of population growth in the United States since its establishment in 1850. However, recent data indicates a notable change.

According to the San Francisco Business Journal, California currently leads the nation in domestic out-migration, with over 367,299 residents having left the state as of July 1, 2021, based on Census data. The driving force behind this substantial shift is the issue of affordability.

The average price of a single-family home has surged by 23.9% compared to the previous year. With the increase in remote work opportunities, individuals no longer feel compelled to live within commuting distance of their employers, prompting them to trade high California rents for more affordable properties in other states.

While 2021 marks the first year of reported population decline, California has experienced a consistent loss of residents to other states over the past decade. According to the Public Policy Institute of California, between 2010 and 2020, the state saw a net loss of 6.1 million residents to other states, with only 4.9 million individuals relocating to California.

The primary drivers of this outward migration are the high cost of living, including the nation's highest state income tax, highlighting the real economic challenges faced by many in the post-pandemic world.

Challenging Landscape: California's Unfavorable Landlord Laws

Top view aerial photo of sea landscape representing the challenging landscape of Californias unfavorable landlord laws and the use of 1031 exchange for passive income in real estate

Landlord-tenant laws vary from state to state, with some statutes favoring tenants more than others. In the case of California, many consider its landlord/tenant laws to be the least favorable to property owners in the entire country.

While it is uncommon for cities to impose additional regulations on top of state laws, two major cities, San Francisco and Los Angeles, have implemented aggressive restrictions on landlords, further exacerbating the situation. As a result, these cities are often regarded as two of the most anti-landlord cities in the United States.

The implementation of the California Tenant Protection Act in 2019 brought about rent control and eviction laws that affect a majority of residential properties, including those in Los Angeles and San Francisco. In fact, over 85% of rental units in Los Angeles are subject to rent control, and in San Francisco, the last allowable rent increase was a mere 0.7%. Additionally, California landlords must demonstrate "just cause" in order to terminate a tenancy, further limiting their flexibility.

For anyone who owns residential rental investments, it is crucial to be well-versed in the specific landlord laws of the state and any city-specific regulations that may hinder their financial growth. Understanding these legal complexities is paramount in navigating the challenging landscape faced by landlords in California.

The Burden of Taxes: California's Highest Capital Gains Tax

When considering the sale of an investment property, one crucial factor that can deter property owners is the potential tax liability they would face. It's important to recognize that the total tax liability associated with the sale of an investment property encompasses more than just the federal capital gains tax. It also includes state capital gains tax, depreciation recapture tax, and net investment income tax.

For property owners in California, these taxes can be particularly substantial. The potential tax liability in California is the highest among all states in the U.S., with up to 42.1% of net proceeds potentially being paid as federal and state taxes. This high tax burden reflects the combination of federal capital gains tax rates and California's state capital gains tax rates, which significantly impact the overall tax liability for property owners in the state.

Understanding the significant tax implications is crucial for California property owners considering the sale of their investment properties. It is advisable to consult with tax professionals and financial professionals to assess the specific tax implications of a potential sale and explore strategies to mitigate the tax burden while maximizing returns.

The Popularity of 1031 Exchanges among California Landlords

Woman holding keys signifying real estate concept representing California landlords making passive income through 1031 exchanges

1031 Exchanges have gained significant popularity among California landlords due to the various benefits they offer, particularly in relation to the high tax liabilities faced by property owners in the state. The primary advantage of utilizing a 1031 Exchange when selling a rental property is the deferral of the substantial tax liability that California landlords would typically face. By deferring taxes on the relinquished property, landlords can reinvest a larger portion of the net proceeds into a replacement property.

Furthermore, a 1031 Exchange allows property owners to strategically choose a replacement property that aligns with their financial and lifestyle objectives. This provides an opportunity to select a more desirable location or property type that better suits their investment goals. For instance, landlords can transition from actively managed properties to investment real estate that potentially generates passive income, such as management-free 1031 Delaware Statutory Trust (DST) properties.

This flexibility enables landlords to exchange a multi-family rental property for fractional ownership in a larger, professionally managed institutional-quality property, such as Class-A multifamily, industrial, or medical office properties. By diversifying their investments through multiple replacement properties, landlords can also better mitigate risk associated with owning a single property.

In summary, the popularity of 1031 Exchanges among California landlords stems from the ability to defer taxes, reinvest a larger amount into replacement properties, strategically select properties that align with investment goals, and potentially transition to potentially passive income-generating investments. These advantages make 1031 Exchanges an appealing option for landlords seeking to optimize their real estate portfolios and address their financial objectives.

Understanding the Mechanism of a 1031 Exchange

A 1031 Exchange, named after Section 1031 of the U.S. Internal Revenue Code, provides a means for selling investment real estate without incurring immediate capital gains tax. This tax deferral strategy allows investors to reinvest the sales proceeds into like-kind investment property of equal or greater value while adhering to the rules and timing requirements outlined in IRC 1031. The term "like-kind" refers to any real estate held for business or investment purposes, enabling exchanges between different types of investment properties.

While a 1031 Exchange offers a valuable opportunity to defer capital gains, depreciation recapture, and net investment income taxes, it is essential to recognize that these transactions can be complex. The flexibility lies in the range of strategies that can be employed, but strict adherence to the rules set by the IRS is crucial.

Failing to comply with IRS regulations can result in a failed Exchange, leading to the full tax liability becoming due, or a Partial Exchange, where a portion of the tax liability remains (typically the most significant portion).

Investors considering a 1031 Exchange should familiarize themselves with the workings of these transactions, including the specific rules and timing requirements established by the IRS. To gain a deeper understanding of 1031 Exchanges, we offer a complimentary guide, "Understanding 1031 Exchanges," which provides valuable insights and information. You can download this guide for free to enhance your knowledge about 1031 Exchanges and make informed decisions when selling investment property.

Determining Suitability: Is a 1031 Exchange the Right Option for You?

If you are contemplating the sale of your California rental property, a 1031 Exchange can present itself as a highly advantageous option, offering numerous potential benefits that contribute to the possibility of wealth growth.

First and foremost, understanding the tax liability associated with your relinquished property is crucial. This assessment will allow you to compare the net proceeds available for reinvestment with and without a 1031 Exchange. By deferring taxes through a 1031 Exchange, you can potentially retain a larger portion of your investment capital to reinvest.

Equally important is gaining a comprehensive understanding of the rules and timeline governing a 1031 Exchange. The IRS imposes strict regulations, and adherence to these guidelines is vital to qualify for tax deferral. Familiarizing yourself with these rules will ensure a smooth and successful exchange process.

To attempt to maximize the benefits of a 1031 Exchange, it is essential to establish clear financial and lifestyle objectives. The replacement properties you select should align with your specific goals, taking into consideration factors such as risk tolerance, desired cash flow, appreciation targets, liquidity needs, management control preferences, and estate planning considerations.

Seeking guidance from a licensed 1031 Exchange professional before selling your investment property is highly recommended. They can assist you in navigating the complexities of 1031 Exchange rules, accurately assessing your tax liability, and identifying suitable replacement properties that align with your financial and lifestyle objectives.

By consulting an expert in 1031 Exchanges, you can better ensure compliance with regulations, gain a comprehensive understanding of your options, and make informed decisions that seek to optimize the benefits of your investment strategy.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication. 

1031 Risk Disclosure: 

Can Vacant Land Qualify for a 1031 Exchange?

When it comes to a 1031 exchange, vacant land can be considered an eligible real estate asset. However, it's important to navigate the process carefully, as there are specific requirements and considerations to keep in mind.

Investor intent plays a crucial role in determining eligibility. If the vacant land is acquired with the intention of selling it for a profit, rather than for investment or business use, it may not qualify for a 1031 exchange. The property must be held for investment purposes, where the focus is on the potential increase in land value.

It's essential to understand the distinctions between acquiring land for resale purposes, such as a condominium development, and acquiring it with the intent of long-term investment. By meeting the investment criteria, investors may be able to successfully utilize a 1031 exchange for vacant land transactions.


Navigating the Strict Rules of a 1031 Exchange

A 1031 exchange is a powerful tax strategy that allows investors to defer capital gains taxes by reinvesting the entire proceeds from the sale of an investment property into a like-kind replacement property. However, the Internal Revenue Service (IRS) has implemented stringent rules and regulations to safeguard the integrity of these exchanges.

One fundamental requirement of a 1031 exchange is the "like-kind" rule, which permits the exchange of almost any investment property for another, as long as they are of the same nature or character. This means that an investor can swap a residential property for a commercial building, vacant land for a rental property, or even a farm for a shopping center. The flexibility provided by the like-kind rule allows investors to diversify their portfolios and explore different investment opportunities while deferring taxes.

Another crucial aspect of a 1031 exchange is the timeline in which it must be completed. The IRS imposes a strict time limit of 180 days, starting from the sale of the original property, to identify and acquire the replacement property. This timeframe poses challenges for investors considering build-to-suit exchanges. In such cases, where the value of the replacement property depends on the completion of improvements, the investor must ensure that the construction is finalized within the 180-day window. Failing to meet this deadline may result in the recognition of taxable boot, which refers to any cash or non-like-kind property received during the exchange.

Maintaining the value and debt balance between the relinquished property and the replacement property is another critical requirement of a 1031 exchange. The value of the replacement property must be equal to or greater than the relinquished property, ensuring that the investor maintains the same level of investment. Similarly, any debt associated with the relinquished property must be offset by an equal amount of debt on the replacement property. If the investor receives cash or reduces their debt in the process, it will be considered taxable income.

Complying with these stringent rules and regulations is essential to successfully execute a 1031 exchange and maximize its tax benefits. Seeking guidance from qualified professionals, such as tax advisors and qualified intermediaries, can help investors navigate the complexities of these exchanges and ensure compliance with IRS guidelines.

By understanding and adhering to the strict rules governing 1031 exchanges, investors can take full advantage of this tax strategy to attempt to defer taxes, preserve capital, and continue growing their real estate portfolios.


Utilizing an Exchange Accommodation Titleholder for Build-to-Suit Exchanges

When undertaking a 1031 exchange with the objective of acquiring land for development purposes, the involvement of an Exchange Accommodation Titleholder (EAT) becomes crucial. While the Exchange Accommodator, also known as a Qualified Intermediary, is a standard component of any 1031 exchange, the EAT plays a more significant role in facilitating the transaction.

The EAT serves as the custodian of the proceeds from the sale of the relinquished property, holding the funds in an account until they are utilized to complete the purchase of the replacement property. They also receive formal notice of the potential replacement property under consideration and handle the necessary paperwork and documentation throughout the exchange process.

In the case of a build-to-suit exchange, the EAT acquires the legal title to the designated vacant land, assuming ownership until the improvements on the property are finished. Once the construction is completed, the original investor can proceed with the exchange, utilizing the EAT's services to transfer the title and fulfill the requirements of the 1031 exchange.

By engaging an Exchange Accommodation Titleholder, investors can effectively navigate the complexities of build-to-suit exchanges and ensure compliance with the IRS regulations governing 1031 exchanges. The involvement of an experienced EAT helps streamline the transaction, providing the necessary support and expertise to facilitate a successful exchange process.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

What Are the Criteria for Disqualifying a Property From Being Used in a 1031 Exchange?

The 1031 exchange involves several rigid requirements, which include:

●     The replacement property/properties obtained must be of equal or higher value compared to the relinquished property.

●     The investor/exchanger must comply with strict calendar deadlines.

●     All funds and proceeds involved in the exchange process must be handled by a Qualified Intermediary (QI).

Additionally, the eligibility of properties is another crucial and non-negotiable factor in a 1031 exchange. Although this process can defer capital gains tax and depreciation capture expenses, not all properties are eligible for the exchange.

Not So Long Ago..

Once upon a time, there was a time when 1031 exchanges allowed for certain types of personal or intangible properties to be exchanged. Machinery, equipment, and even collectibles were eligible for exchange, as well as patents and copyrights. However, things changed with the enactment of the Tax Cuts and Jobs Act of 2017.

With the new legislation, many assets that were previously allowed in a like-kind exchange became disqualified. The law now stipulates that only "real property held for productive use or investment" is eligible for a 1031 exchange. This means that only properties like land, buildings, and other permanent structures that are used for business or investment purposes qualify for the exchange.

While the new law may have limited the scope of eligible assets for 1031 exchanges, it still provides a valuable opportunity for investors to defer paying taxes on the gains from their real estate investments. By exchanging their properties for similar ones of equal or greater value, investors can continue to build their real estate portfolios without incurring significant tax burdens.


Taking a closer look

 It's important to note that not all types of real estate are eligible for a like-kind exchange. The IRS has outlined specific categories of real estate that do not qualify for this treatment, which include:

If you're considering purchasing a property with the intention of flipping it for a profit, it's important to note that you cannot include it in a 1031 exchange. The IRS views this type of real estate ownership and transaction as "held primarily for sale" or "stock in trade."

To determine if a property is held primarily for sale versus being held for investment purposes, there are specific parameters to consider. These include:

●     The purpose for which the property was initially purchased and its intended use at the time of sale

●     The extent of any improvements made to the property

●     The number of sales made, as well as the frequency of those sales

●     The investor's primary occupation or business

●     The use of advertising, promotion, or other efforts to attract buyers

●     The property being listed with brokers

●     The length of time the property is held

In short, if an investor's intention was to purchase a property, make improvements to it, and then sell it quickly to another buyer for a profit, the property is not eligible for a like-kind exchange. Additionally, any investment property sold within 12 months of acquisition can raise a red flag with the IRS.

Primary Residence

If you're wondering whether you can exchange your primary residence, the answer is no. Although the value of your home may increase over time, it is not considered real estate that is being held for trade or investment.

However, there is a possible way to qualify your primary residence for a 1031 exchange treatment. If you decide to rent out your home instead of living in it, it may be eligible, yet some very strict rules apply. Firstly, you cannot live in the property while it is being rented out. Additionally, you must plan to hold onto the property and rent it out for a minimum of two years for it to qualify for the exchange.


Foreign Real Estate

If you're considering a 1031 exchange involving foreign real estate, there are a few rules to keep in mind. While you can relinquish a property in the United States for a replacement property in the U.S. Virgin Islands or Guam, you cannot exchange it for property in Puerto Rico, Canada, Mexico, or any other location outside the United States.

However, you can exchange foreign real estate that is held for trade or investment for real property in any country other than the United States. It's important to note that each country has its own rules and regulations for the purchase, sale, and exchange of real estate, so be sure to do your research before proceeding with any foreign property transactions.

What to know before exchanging

If you're considering a 1031 exchange, there are several important factors to consider before proceeding. First and foremost, you need to ensure that the real estate you want to exchange and the property you want to exchange into are both IRS-qualified. This means that they must be "like-kind" properties that are held for productive use or investment.

It's also essential to understand the deadlines and regulations involved in the exchange process. For example, you have 45 days from the sale of your relinquished property to identify potential replacement properties, and you must close on the replacement property within 180 days of the sale of the relinquished property.

Failing to comply with the rules and regulations of a 1031 exchange can result in significant tax consequences. Instead of deferring your capital gains tax, you may end up with an unexpected tax bill. Therefore, it's crucial to consult with a qualified tax professional or attorney who can guide you through the process and ensure that you're following all the necessary steps to make a successful 1031 exchange.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Liquid vs. Illiquid Assets: Which is Better for Investors?

When it comes to investing, one important factor that must be considered is liquidity. Liquidity is the ease with which an asset can be converted to cash without affecting its market value. This means that the more liquid an asset is, the easier it is to sell it in the market without causing its price to drop significantly. In this article, we will discuss the pros and cons of liquid and illiquid investments and help you understand which one might be better for you.

Understanding Liquidity

Investments can be tangible or intangible assets. Tangible assets include real estate, art, and collectibles, while intangible assets include stocks, bonds, and other securities. Generally, tangible assets are considered to be illiquid because they can be harder to convert to cash. On the other hand, cash and cash equivalents are the most liquid assets because they can be easily converted to other assets.

In the case of debt securities, an investor could reference credit ratings issued by third parties to assess risk and liquidity. Bonds with lower credit ratings are generally considered riskier assets, and therefore the overall demand for these bonds is typically lower than those of higher credit quality assets. As a result, riskier bonds, also called junk bonds, will offer the lowest amount of liquidity but could offer the highest potential reward.

Illiquid Investments

Illiquid investments are those that cannot be traded or sold with ease without incurring a loss in value relative to their fair market value. Real estate, collectibles, and art are examples of illiquid assets.

These assets are considered to be illiquid because it is not easy to convert them to cash or another asset type. Therefore, investors will require compensation for the added risk of investing in illiquid assets. This added compensation is referred to as the liquidity premium.

When it comes to illiquid investments, it is important to note that degrees of liquidity will vary. For instance, some real estate is more desirable than others. Hedge funds and private market funds are other examples of illiquid investments. Liquidity terms amongst these funds will vary as well.

Liquid Investments

Cash and cash equivalents are the most liquid assets, followed by marketable securities like stocks and debt securities like bonds. Within these asset categories, nuances arise that offer varying degrees of liquidity.


Liquid vs. Illiquid Assets: Which is Better for Investors?

The decision of whether to invest in liquid or illiquid assets depends on various factors, including an investor's sophistication level, risk appetite, and investment objectives. Liquid assets can be easily converted to other asset types, while illiquid assets require a longer time to convert to cash or another asset. In general, the more illiquid an investment is, the greater the risk and associated liquidity premium will be.

However, illiquid investments often offer higher potential returns than liquid investments, and they have the potential to be less volatile in the short-term. Moreover, illiquid investments are historically less affected by market fluctuations and can provide a hedge against inflation. On the other hand, liquid investments are more suitable for investors who prefer short-term investments and need easy access to cash.


Liquidity is an important aspect of the financial market as it allows investors to buy or sell assets quickly and easily. This is particularly important for traders who are looking to make short-term gains, as they need to be able to move in and out of positions quickly. For example, stocks that are traded on major stock exchanges are typically considered liquid, as they can be bought or sold at any time during trading hours, and their prices are determined by supply and demand.

On the other hand, illiquid assets may not have an active market, making it difficult to buy or sell them quickly. This can result in the asset being priced lower than its fair market value, as there may be limited demand for the asset. Illiquid assets can include things like real estate, private equity, and certain types of bonds.

When investing in illiquid assets, investors need to be aware of the risks involved. In addition to the potential for a loss of value due to a lack of demand, illiquid investments may also be subject to a higher level of risk due to factors such as changing economic conditions, limited information about the asset, and the difficulty of finding a buyer if the investor needs to sell.

That being said, there are certain advantages to investing in illiquid assets. For example, they may offer higher potential returns than more liquid assets, as the added risk of holding the asset for a longer period may result in a higher payoff. Additionally, investing in illiquid assets can help diversify a portfolio, as they may not be as closely tied to the broader market as more liquid assets.

Overall, the decision to invest in liquid or illiquid assets depends on a number of factors, including the investor's financial goals, risk tolerance, and investment horizon. Investors who are looking for short-term gains and need to be able to quickly move in and out of positions may prefer more liquid assets, while those with a longer-term investment horizon and a higher risk tolerance may be more comfortable investing in illiquid assets.

It is important for investors to carefully evaluate their options and understand the risks before making any investment decisions.

Investing in US Energy Real Estate Could be a Wise Decision

Prominent oil and gas industry experts predict a bull market in 2023 and beyond, making it a favorable time to consider diversifying investment portfolios by investing in energy real estate. Despite a temporary dip in demand during the COVID pandemic, the industry has recovered, with continued demand also rising for home heating oil and gas. Consider taking advantage of the potential growth in the industry in 2023. 

Expanding Supply / Demand Disparity 

Energy experts predict a sustained bull market in oil and gas due to a persistent supply-demand imbalance. If you're new to energy markets, it’s important to understand the fundamentals of supply and demand in these industries. 

Oil and Gas Supply 

The world's oil and gas supply is primarily influenced by three factors: 

1. U.S. Shale - While U.S. shale production has increased by 11.6 million barrels per day, it falls short of meeting growing demand, which requires production of around 13 million barrels per day. The traditional shale model relied on access to debt and equity markets, allowing companies to spend more than their cash flow each year. However, debt markets are now more stringent and focused on ESG investments and net-zero goals.

Furthermore, production is restricted by equity investors who prefer stable production and maximizing free cash flow instead of growth. Additionally, the best shale acreage has already been extensively developed, forcing several companies to shift to lower-yielding Tier 2 and Tier 3 assets, limiting future shale production. Owners of productive Tier 1 assets will likely hold off on further drilling as the shortage of supply drives up the value of their assets. 

2. OPEC - OPEC nations have faced low oil prices for the past six to seven years, sometimes below the fiscal break-even point, causing financial strain and requiring divestment and increased borrowing. However, they have not been allowed to invest in new productive capacity. Some countries are now underproducing their quota, losing billions of dollars. Despite having a spare capacity of around 2-3 million barrels per day, they are bringing in less than that capacity, leading to a continued shortage in global supply. 


3. Global Super Majors - The Global Super Majors are large oil and gas companies mostly based in Europe, such as Shell and BP, among others. They have not invested enough in production since the 2014 oil price crash and now face pressure from shareholders to increase dividends, conduct share buybacks, and reach net-zero by 2050. Thus, they are shifting their investments from oil production to renewables like offshore wind.

Peak Demand 

The discourse surrounding the peak demand for oil is a topic of great significance. The lack of knowledge on the utilization of oil, alternatives to it, and a feasible timeline for transitioning to such alternatives has been deemed as "energy ignorance" by industry experts. 

It's common to presume that gasoline consumption for transportation is the primary factor driving demand for oil. However, as the shift towards hybrid and electric vehicles gathers pace, one could reasonably anticipate a decline in the demand for oil. 

The use of oil is much more varied than one might expect. While approximately 60% of oil is used for transportation, only about 27% of that is for cars, with the rest being used for other forms of transportation such as heavy hauling trucks and planes.

Despite the growth in the number of electric vehicles (EVs) globally, it will likely take at least two decades to reach the point where EVs significantly impact oil demand for cars. Similarly, alternatives such as hydrogen fuel for trucks and renewable jet fuel are not expected to become widespread for several more years. 

The remaining 40% of oil demand comes from various industries such as petrochemicals, lubricants, plastics, cement, and agriculture. This demand is driven primarily by global population growth, which is expected to increase by 32% by 2050. This could keep demand for oil at all-time highs. 

With the end of the era of oil and gas hypergrowth approaching, the world is on the brink of an oil supply crisis. To limit demand, some projections suggest oil prices will need to reach at least $150 per barrel, a number that experts believe is several years into the future. 

Historical Performance of Oil and Gas during Inflationary Periods 

The relationship between inflation and investment in natural resources is often considered complex by experts. If the current inflation resembles past experiences like the 1970s (when oil prices rose 361%) or the 1999-2008 bull market (when oil stocks increased 341%), it could be favorable for oil and gas investors. 

Historically, natural resources have outperformed when commodity prices declined compared to the broader market. Data supports this - during inflationary periods, a weakened US dollar tends to lead to higher oil prices and favor oil investments. 

Historically, Global Turmoil Boosts the Appeal of Oil and Gas Investments 

Geopolitical turmoil raises oil and gas prices, as seen in March 2022 with the Russian invasion of Ukraine. The DJIA plummeted and oil prices rose over $115 per barrel, surpassing analysts' expectations. The energy crisis is expected to worsen, with natural gas prices in Europe doubling in a week this past winter. 


Investing in oil and gas has had a negative image, as big investors seek diversification and the Super Majors face pressure to invest in alternative energy. Despite this, oil and gas still has high potential demand and an imbalance in supply and demand may benefit investors through dividends and share buy-back programs. When invested wisely, oil and gas may be a valuable addition to a portfolio, offering low historical correlation with traditional stocks, bonds and equities and potential for high returns. 

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.