A direct participation program, or DPP, is a non-traded investment that pools money from individual investors into a business venture and passes the income, losses, and tax benefits directly through to them without being taxed at the entity level first. DPPs typically hold long-lived, capital-intensive assets like commercial real estate, oil and gas wells, or leased equipment. Because the interests don’t trade on a public exchange, your money is generally tied up for years.
How a DPP Is Structured
FINRA defines a direct participation program as any program that produces flow-through tax consequences, regardless of the legal form used, and specifically includes oil and gas programs, real estate programs, and Subchapter S corporate offerings.1FINRA. FINRA Rule 6420 – Definitions
The classic form is the limited partnership. A general partner runs the business and carries unlimited personal liability for its debts. Investors come in as limited partners, and their financial exposure generally cannot exceed what they contributed. Some programs use limited liability companies or Subchapter S corporations instead. Both give investors liability protection and still allow income and losses to flow through to individual tax returns.
Whatever the entity, a partnership or operating agreement sets the rules: voting rights, when distributions are paid, how the sponsor is compensated, and what happens when the program winds down. Read it before you sign.
What DPPs Invest In
DPPs concentrate on capital-heavy industries where physical assets generate cash flow over long horizons. The main categories are:
- Real estate programs that buy and operate apartment complexes, shopping centers, or office buildings and collect rent. Some are organized as non-traded REITs.
- Oil and gas programs that fund exploration, drilling, or production.
- Equipment leasing programs that buy high-value items like commercial aircraft, shipping containers, or medical technology and lease them to operators.
- Raw land programs that hold undeveloped property for later development or resale.
Many DPPs launch as “blind pool” offerings, meaning the sponsor has not yet identified the specific properties it plans to buy when you commit your money. The SEC requires the sponsor to file supplements as significant acquisitions are made and to consolidate those supplements into a formal amendment at least every three months.2SEC. CF Disclosure Guidance Topic No. 6 You get that information at the same time it’s filed.
The Tax Picture
The tax structure is the reason DPPs exist as a distinct product. The entity pays no federal income tax. Instead, every dollar of income, loss, deduction, and credit flows through to investors in proportion to their interests. Each year you receive a Schedule K-1 showing your share. Partnerships must deliver K-1s by March 15, though extensions to September 15 are common because finalizing the numbers on large ventures takes time.
Passive Activity Rules
Federal tax law treats DPP interests as passive activities. That has a sharp consequence: losses from a DPP can only offset income from other passive sources. You cannot use them to shelter your salary, freelance earnings, or portfolio income like stock dividends or interest.3Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited Passive losses you can’t use in a given year carry forward until you have enough passive income, or until you dispose of your entire interest in the activity.
At-Risk Rules
A second limit sits in front of the passive rules. You can only deduct losses up to the amount you have “at risk” in the program. That amount includes cash you contributed, the adjusted basis of property you contributed, and borrowed money for which you are personally liable or have pledged non-program property as collateral.4Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk Losses above your at-risk amount carry forward until your at-risk amount grows enough to absorb them.
Extra Benefits in Oil and Gas
Two features are specific to oil and gas programs. Investors may elect to deduct intangible drilling costs — expenses like labor, chemicals, and supplies used in drilling — in the year those costs are incurred rather than capitalizing them over the life of the well.5Office of the Law Revision Counsel. 26 USC 263 – Capital Expenditures That can produce a large deduction in the early years.
Independent producers and royalty owners, which includes most DPP investors, may also claim a percentage depletion allowance at 15 percent of gross income from domestic oil and gas production, subject to limits. The deduction cannot exceed 65 percent of the taxpayer’s taxable income for the year. In a partnership or S corporation, each investor computes depletion individually based on their share of production and their basis in the property.6Office of the Law Revision Counsel. 26 USC 613A – Limitations on Percentage Depletion in Case of Oil and Gas Wells
Fees Are Substantial
DPP sponsors and the broker-dealers who sell them collect fees at almost every stage: upfront selling commissions, acquisition fees when the program buys assets, ongoing asset management fees, and disposition fees when assets are sold. Costs can eat a meaningful share of your capital before the program produces anything.
FINRA sets outer limits. Organization and offering expenses (sales commissions, legal fees, and other launch costs) are presumed unfair and unreasonable if they exceed 15 percent of gross offering proceeds. Total compensation paid to underwriters, broker-dealers, and their affiliates is presumed unfair and unreasonable if it exceeds 10 percent of gross proceeds.7FINRA. FINRA Rule 2310 – Direct Participation Programs Those are ceilings, not targets, but they give you a sense of how much heavier the cost structure is than a publicly traded fund.
Who Can Invest
Most DPPs are sold under Regulation D exemptions and are limited to accredited investors. Under SEC rules, an individual qualifies as accredited if net worth exceeds $1,000,000 excluding the primary residence, or if income exceeded $200,000 individually (or $300,000 jointly with a spouse or partner) in each of the two most recent years with a reasonable expectation of the same level in the current year.8eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D These thresholds have not been adjusted for inflation and are unchanged for 2026.9SEC. Accredited Investors
When a broker-dealer recommends a DPP to a retail customer, the recommendation is governed by SEC Regulation Best Interest, in effect since June 30, 2020. Reg BI requires the broker-dealer to act in your best interest at the time of the recommendation and not to place its own financial interests ahead of yours.10eCFR. 17 CFR 240.15l-1 – Regulation Best Interest It’s a stricter standard than the older FINRA suitability rule, which still exists but does not apply where Reg BI already covers the recommendation.11FINRA. FINRA Rule 2111 – Suitability In practice, the broker must evaluate your financial situation, objectives, and risk tolerance, consider reasonably available alternatives, and have a clear basis for choosing an illiquid, high-fee product over something more liquid or lower cost.
Getting Your Money Back
Liquidity is the constraint that catches new DPP investors off guard. These interests don’t trade on an exchange, so you can’t sell whenever you want. Most programs are built around a holding period of roughly five to ten years before any liquidity event.
Redemption Programs
Some non-traded REITs and other DPPs run share redemption programs that let you sell shares back to the program before a full exit. These are capped. A common structure limits redemptions to about 20 percent of outstanding shares annually, with quarterly and monthly sub-limits. Sponsors can reduce or suspend redemptions when requests exceed available funds. The program is not obligated to buy your shares on demand.
Liquidity Events
The usual exit paths are listing the program’s shares on a public exchange, selling the underlying assets to a third-party buyer, merging with another entity, or liquidating and distributing what’s left.12SEC. How Do Startups Exit or Provide Liquidity to Investors In a liquidation, the program sells its assets, pays its debts, and returns the remainder to investors in the order set by the partnership or operating agreement.
Roll-Ups
A roll-up transaction combines multiple limited partnerships into a single new entity. FINRA requires specific investor protections when a roll-up involves a significant adverse change to voting rights, management compensation, the program’s lifespan, or investment objectives. Investors who vote against the roll-up are treated as dissenting limited partners and must be offered the option to retain a security on substantially the same terms as the original investment.7FINRA. FINRA Rule 2310 – Direct Participation Programs
What Your Account Statement Shows
Because there’s no market price, the value shown on your statement is an estimate. FINRA requires broker-dealers to include a per-share estimated value along with a disclosure that the securities are not listed on a national exchange, are generally illiquid, and may sell for less than the estimated value shown.13FINRA. FINRA Rule 2231 – Customer Account Statements
For roughly the first two years after the program starts accepting investors, the value can be calculated using a “net investment” method, essentially the offering price less estimated selling commissions and organizational costs. After that, the estimate must be based on an independent appraisal of the program’s assets and liabilities, performed at least annually by a third-party valuation expert. If any part of a distribution you receive is actually a return of your original capital rather than investment income, your statement must say so, because a return of capital reduces the estimated value of your remaining shares.