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43 Cards in this Set
- Front
- Back
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DPP usually invest into what type of investments?
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real estate
oil/gas equipment leasing |
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the sponsor or manager of a DPP is the what?
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General Partner(s)
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How much liability does the General Partner have in the investments?
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UNLIMITED liability
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How is the cost basis for tax purposes determined for an investor in a DPP? What is it called?
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for tax purposes an investor uses the "adjusted basis"
which is increased by: Additional contributions by the partner Partnership income recourse loans Decreased by: - distributions of property (including cash_ to the partner by the partnership - Partnership losses - non-deductible partnership expenses - depletion deductions for oil/gas |
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If an investor invests $10,000 in a Real Estate Limited Partnership and at the end of the first year receives a return of $6,000 and reinvest $3,000 of his return what is his adjusted basis?
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$10,000 (investment) - $6,000 (return) = $4,000 Initial adjusted basis
$4,000 + $3,000 (reinvestment) = $7,000 New adjusted basis he can write off $7,000 **remember an investor can NEVER write off more than their adjusted basis |
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What is the difference between a recourse loan and a NON-recourse loan?
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recourse - the investor is held individually responsible for
Non-recourse - the investor is NOT held personally responsible. intend the lender accepts partnership property as collateral in case of default |
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Do limited partnerships have to pay federal income taxes? For taxes what form is filed? What can do with capital cost on taxes?
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the limited partnership does not have to pay federal income taxes.
Instead the income and expenses flow through to their individual taxes where they file a K-1 form capital costs can be depreciated and written off |
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What is the maximum amount of capital risk a limited partner has?
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Limited to the investors initial cash investment
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What are the disadvantages of DPPs?
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Lack of liquidity
Lack of control Changes in tax code Loss of investment IRS scrutiny AMT consequences |
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What are the most important factors an investor should consider before purchasing an interest in a DPP?
What is not important to consider when considering a DPP? |
- **economic viability of the program
- loss of principal - potential conflicts of interest with general partner -changes in Federal tax code - Projected rate of return the financial condition of other limit partners is not important |
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What must the certificate of limited partnership contain and where must it be filed?
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it must contain:
1. info about future contributions by limited partners 2. manner in which new partners may be added 3. arrangement for sharing profits and losses 4. Explanation of the general partners role in the venture Must be filed with the secretary of state in the state the partnership is formed |
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Which of the following require that the certificate of limited partnership be amended:
- change in profit sharing arrangements - net loss for the year - increase in contributions from limited partners - error discovered in original certificate |
all must be amended except the net loss for the year
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What must a DPP do if they want to offer it to the public?
What must the General partner obtain in order to act as the syndicator? |
DPP - Register with the SEC
General Partner - Register with FINRA |
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What is the maximum underwriting spread permitted for a DPP that is being offered to the public?
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10%
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What is the signed application agreement by an investor to become a limited partner?
What does it indicate the investor has done? what does it require from the investor? |
Subscription agreement
indicates that they have read the PROSPECTUS and UNDERSTANDS the RICKS states general partner will act as agent for partnership requires a statement that the investor has sufficient income or net worth and either their SS# or Tax ID# |
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When does the sale of a DPP partnership become final?
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When the general partner signs the subscription agreement submitted by the investor
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Upon Dissolution of a limited partnership claims would be paid off in what order?
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Creditors - secured then general(unsecured)
Limited Partners - profit claims, then capital claims General partners - Profit claims, then capital claims(*liable) |
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What are the 4 major characteristics used to distinguish a corporation?
How many of the characteristics must a business organization have of these 4 to be considered a corporation for federal tax purpose? What is most characteristics a limited partnership can have to still be a limited partnership? |
1. Centralized management (Limited Partnerships always have this - general partner)
2. Free transferability of beneficial interest (Limited partnerships do not have this which is why they are NOT liquid) 3. Limited Liability (limited partnerships always have this not avoidable) 4. Continuity of life (limited partnerships always have a date of termination) if a business organization has 3 of these they are classified as a corporation for federal tax purposes A limited partnership can only have 2 of these factors to be treated as is |
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Can losses from passive activities (limited partnership interests) be deducted from ordinary income?
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No they can only be deducted from income from the passive activities. Income from the limited partnership but it can be carried over into future years.
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When can excess losses from a limited partnership be deducted in full?
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Only when the taxpayer/investor sells their interest in a TAXABLE transaction
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Congress made an exception to the rule. the Tax Code allows up to $25,000 of losses from rental real setae activities to be deducted from ordinary income. How would a limited partner go about taking advantage of this deduction?
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In order for a limited partner to take advantage they would have to give up their limited liability and become a general partner as the law requires an individual be an active participate
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When can the IRS not "recapture" some of the depreciation tax benefits on a sale by taxing part of the gain as ordinary income?
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For real estate (developed land) the straight line depreciation method is used and the the IRS cannot recapture by taxing the gain on the asset that is sold
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What type of Real Estate DPP would be purchased for the purpose of capital gain?
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Raw land - cannot be depreciated under Federal tax law
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What can Real Estate DPP investors deduct from their activity income?
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depreciation
interest payments on mortgages **CANNOT deduct principal payments |
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For triple net lease Real Estate DPPs who is responsible for the property taxes, and insurance?
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the tenant.
New owner only pays debt service |
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What is the document that specifies the area over which a condominium owner has exclusive use and the areas that are shared with other owners?
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Unit deed
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Under Federal law, condominium units sold to investors by developers for the purpose of renting them out, are classified as what type of investment?
Under hobby loss rules what keeps them from not being classified as a residence? |
securities.
not used for more than 14 days or 10% of the rental period (time shares) |
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REAL ESTATE LIMITED PARTNERS SHARE DPP
Revenue $600,000 Operating expenses $300,000 Managers Fee $100,000 Interest $190,000 Depreciation $110,000 What is the limited partners loss? What is the cash flow? How much can they put in their pocket & not have to pay taxes? |
Revenue - all deductions = $100,000 losses
**this means they can write off $100,000 against their income Revenue - all deductions (except depreciation) = +$10,000 cash flow Cash flow is their income and since the loss exceeds thier cash flow they can put all of it in their pocket tax free |
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In an oil and gas DPP, items with no salvage value such as labor, supplies, fuel, and repairs are called what?
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Intangible drilling costs
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What are dry hole costs?
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they are drilling costs incurred on well that does not produce oil and are considered intangible drill costs
they are deducted as they are incurred and paid |
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What is a well called that only produces 10 barrels or less a day?
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"stripper well"
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There are 4 main types of oil & gas investment DPP. what program has the greatest risk but the potential for the greatest returns? Which program has the lowest risk of all?
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Exploratory Drilling programs have the most risks and the potential for the greatest returns
Oil & gas income programs has the least capital risk but there are no write offs or depriation |
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What is the balanced drilling program?
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this program uses both exploratory & developmental wells
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Which oil & gas investment DPP drills wells in areas of proven reserves?
What is the disadvantage of drilling in proven reserves rather than unproved? |
Developmental drilling program drills in proven reserves which the leases cost more
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What is wildcatting?
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Wildcatting is the practice of drilling for oil and gas in areas without proven reserves and is used in Exploratory drilling programs
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What happens if an assessment is made and an investor does not have the additional cash?
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their share of revenues plus expenses and percentage of ownership will automatically be reduced
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What is a sharing agreement and what are the four types?
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a sharing agreement is between the sponsor (general partner) and investor(limited partner) as to how revenues and costs are shared & allocated.
1.overriding royalty (carried) 2. disproportionate (promoted) 3. subordinated working (revisionary) 4. Functional allocation (special allocation) |
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What oil and gas sharing agreement does the sponsor not pay any costs but shares in the revenues?
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Overriding royalty (carried)
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What is the most common sharing agreement for an oil and gas DPP?
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Functional allocation (special allocation)
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Which sharing agreement is where the sponsor dose contribute towards the cost but also does not see revenues until investor have recovered the cost of their investment?
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Subordinate working (revisionary)
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If a sponsor receives a greater share of revenue then his participation in costs what kind of oil & gas DPP sharing agreement it is?
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Disproportionate (promoted)
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At the ______ point a tax shelter investment that had been generating a tax loss begins to generate a taxable income without the cash flow to pay the tax. This point is also known as ______ or _______. This income that is taxable is known as ________ income.
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Crossover point aka, burnout or turnaround
Phantom Income |
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What is a blind pool arrangement?
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where the investors do not know the identity of the assists until after the partnership is formed
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