DPP Tax Treatment
Chapters in this video
- 0:00 Flow-through taxation and the no-cash tax bill trap
- 1:20 Three income buckets and the passive loss limitation
- 2:16 Real estate depreciation: 27.5, 39, and the land trap
- 3:41 Oil and gas: IDCs versus TDCs and the pumping jack test
- 5:48 Crossover point and phantom income strike
- 6:55 Rapid-fire exam recap
What this video covers
- Why a direct participation program (DPP) investor owes tax on allocated income even when no cash is distributed, and how Schedule K-1 delivers that surprise
- How the three income buckets (active, portfolio, passive) trap limited partners who try to use DPP losses against salary or dividends
- What happens to unused passive losses: suspension, carryforward, and full recognition only upon complete disposition
- Why residential real estate depreciates over 27.5 years, commercial over 39 years, and why land itself is never depreciable
- The immediate deductibility of intangible drilling costs (IDCs) versus the required depreciation of tangible drilling costs (TDCs)
- Who qualifies for percentage depletion (15% of gross income) and why integrated oil companies are excluded, leaving them with only cost depletion
- What the crossover point signals: when deductions are exhausted and phantom income begins flowing through despite zero cash distributions
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