7.1 Direct Participation Programs (DPPs)
Direct Participation Programs allow private investors to participate directly in the tax consequences and cash flows of real estate, oil and gas, and equipment leasing ventures.
Key FINRA Exam Takeaways
- DPPs (typically Limited Partnerships) pass through BOTH income and passive losses directly to investors.
- Passive losses can ONLY offset passive income; they CANNOT offset active income (wages) or portfolio income (dividends/interest).
- General Partner (GP): Unlimited liability, active management role, fiduciary duty, cannot compete with partnership.
- Limited Partner (LP): Limited liability (capped at capital invested + recourse debt), passive investor, no management voice.
- Illiquid: Units do not trade on public exchanges; transfer requires GP written approval.
| Feature | General Partner (GP) | Limited Partner (LP) |
|---|---|---|
| Liability | Unlimited personal liability | Limited to capital contribution + recourse debt |
| Management Role | Active management and decision-making | Passive investor; NO management control |
| Fiduciary Duty | Owes strict fiduciary duty to LPs | No fiduciary duty |
| Loss of Status | Cannot compete with partnership | Takes active management role -> becomes GP liable! |
Knowledge Checkpoint • Section 7.1
An investor in a limited partnership has $8,000 of passive losses generated from a real estate syndication. The investor has $10,000 of portfolio dividend income and $50,000 of earned salary. How much of the passive loss can be deducted on their tax return this year?