Types of DPPs

The Series 7 exam focuses on three main types of DPPs: Real Estate, Oil and Gas, and Equipment Leasing. Each offers different risk/return profiles and tax benefits.

Real Estate DPPs

Real estate partnerships invest in various types of property:

Types of Real Estate Programs

Tax Benefits

• Depreciation deductions - Reduce taxable income
• Mortgage interest deductions - Interest on property loans
• Capital gains treatment - On property appreciation

Key Risks

• Property values may decline
• Vacancies reduce rental income
• Interest rate risk affects financing costs

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Oil and Gas Programs

Oil and gas DPPs invest in energy exploration and production. They offer significant tax advantages but carry substantial risk.

Types of Oil and Gas Programs (By Risk Level)

Exam Tip: Exploratory programs = highest risk; Income programs = lowest risk.

Tax Advantages

Intangible Drilling Costs (IDCs)

• Wages, fuel, repairs, supplies, hauling
• 100% deductible in year incurred
• Typically 60-80% of drilling costs
• Major tax benefit

Tangible Drilling Costs (TDCs)

• Equipment with salvage value (tanks, pumps)
• Depreciated over 7 years
• Typically 20-40% of drilling costs

Depletion Allowances

• Deduction for depleting natural resources
• Cost depletion - Based on actual units extracted
• Percentage depletion - Percentage of gross income (15% for small producers)

Alternative Minimum Tax (AMT) Consideration

Certain oil and gas deductions are tax preference items:

• Excess intangible drilling costs
• Excess depletion
• May trigger AMT liability

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Equipment Leasing Programs

Equipment leasing DPPs purchase equipment and lease it to businesses. This is the least-tested DPP type on the Series 7.

Types of Leases

Tax Benefits

• Depreciation deductions on equipment
• Steady cash flow from lease payments

Risks

• Equipment obsolescence
• Lessee default
• Residual value uncertainty

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Evaluating DPP Investments

Economic Soundness Tests

When analyzing a DPP, consider:

1. Economic viability - Would this investment make sense without tax benefits?
2. Realistic projections - Are income and expense estimates reasonable?
3. General partner track record - Experience and past performance
4. Use of proceeds - How much goes to actual investment vs. fees?
5. Exit strategy - How will investors eventually liquidate?

Cash Flow vs. Tax Benefits

• Best DPPs: Generate real economic returns AND tax benefits
• Worst DPPs: Only provide tax benefits with no economic substance (these may be challenged by IRS)

Important: Economic Substance Rule The IRS may disallow deductions from DPPs that lack genuine economic substance beyond tax benefits. An investment should make economic sense on its own merits.