7.2 Types of DPPs (Real Estate & Energy)
DPPs primarily operate in real estate and energy sectors. Series 7 questions test the comparative risk and tax deductions of exploratory versus income oil programs and raw land versus existing properties.
Key FINRA Exam Takeaways
- Real Estate DPPs: Raw Land (appreciation only, no cash flow or depreciation), New Construction (high appreciation, cost overruns), Existing Properties (immediate cash flow and depreciation deductions).
- Oil & Gas Programs: Exploratory / Wildcat (drilling in unproven areas, highest risk & return, highest Intangible Drilling Costs), Developmental (drilling near proven fields), Income Programs (producing wells, lowest risk, no IDCs).
- Intangible Drilling Costs (IDCs): 100% deductible in year incurred (labor, fuel, supplies).
- Tangible Drilling Costs: Capitalized and depreciated over several years (machinery, casing, wellhead).
Oil & Gas Program Risk Hierarchy
1. Exploratory (Wildcatting): Drilling where oil has not been discovered. High failure rate, but offers immediate 100% IDC deductions and huge upside if strike occurs. 2. Developmental: Drilling near proven reserves. Moderate risk. 3. Income: Buying existing producing wells. Immediate cash flow with depletion allowances; zero IDCs.
Knowledge Checkpoint • Section 7.2
Which type of oil and gas direct participation program carries the HIGHEST investment risk while generating the largest immediate upfront tax deductions?