In a real estate Direct Participation Program (DPP) organized as a limited partnership, limited partners can deduct pass-through depreciation losses that exceed their initial cash contribution if the partnership incurs qualified non-recourse debt, whereas shareholders in a Real Estate Investment Trust (REIT) can never use entity-level net operating losses to offset personal income.
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The statement is true because real estate DPP limited partners may include qualified non-recourse mortgages in their tax basis to deduct pass-through losses exceeding their cash outlay, whereas REITs pass through net income but retain all entity losses at the corporate level.
The statement is accurate in both respects. Direct Participation Programs (DPPs) structured as limited partnerships allow both income and losses to flow through to investors. In real estate DPPs specifically, qualified non-recourse debt increases a limited partner's tax basis, permitting loss deductions that exceed their initial cash outlay. Conversely, Real Estate Investment Trusts (REITs) only pass through income to avoid double taxation; REIT losses remain within the trust and never pass through to individual shareholders.
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Tax Pass-Through Distinction & Basis Adjustment (DPP vs. REIT)