DPPs, REITs, and Hedge Funds
Key facts on direct participation programs, REITs, and private funds, focusing on structure, taxation, and liquidity.
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Questions Covered in This Set
10 cards to master
What is a Direct Participation Program (DPP)?
A business venture, usually a limited partnership, that passes through income, losses, deductions, and credits directly to investors (no entity-level tax).
What tax form reports a DPP investor's share of income and losses?
Schedule K-1 — issued annually because of the partnership's flow-through (pass-through) tax treatment.
Compare the General Partner and Limited Partner in an LP.
GP: manages the program, unlimited liability, fiduciary duty, at least 1% interest. LP: passive, limited liability, may vote on major issues but may not manage.
What rights do limited partners have without losing limited liability?
Vote to sue the GP, dissolve the partnership, approve/remove the GP, and amend the partnership agreement — but never day-to-day management.
Rank oil & gas program risk from highest to lowest.
Exploratory (wildcatting) = highest risk; developmental = moderate; income programs (producing wells) = lowest risk.
How can passive losses from a DPP be used?
Only to offset other passive income — not wages (earned income) or portfolio income.
What is the liquidation priority in a limited partnership?
Secured lenders, then general creditors, then limited partners, then general partners.
What are the two headline REIT percentage rules?
75% of assets in real estate, cash, and government securities (and 75% of income from real estate); distribute at least 90% of taxable income to avoid corporate tax.
How are REITs taxed differently from DPPs?
REITs pass through income but NOT losses, and REIT dividends are generally taxed as ordinary income (not qualified dividend rates).
Who is a DPP suitable for on the exam?
A wealthy, sophisticated investor with a long time horizon who understands illiquidity — never someone needing liquidity or safety of principal.
