Tax-shelter appeal has slipped, but some see new lift
The rising tide of inflation and low-interest loans during the 1970s managed to lift the limited partnership tax-shelter business into an elite position in the investment world. At top brokerage firms, real estate syndicators and oil and gas sponsors roamed the country with lavish expense accounts assembling properties, while brokers pushed out investment products to an ever-expanding market.Skip to next paragraph
Subscribe Today to the Monitor
Investors had found they could get a better than respectable return and avoid the tax collector. As oil prices rose 1,000 percent from 1973 to 1980, the average oil fund became a fairly impressive performer. According to the Stanger Report the ''average after-tax rates of return were in the 10 percent to 14 percent range'' for oil and gas drilling partnerships. The Dow Jones industrial average would have netted investors 6.8 percent compounded with reinvested dividends.
But with inflation now halted - or at least in abeyance - investors have turned more tentative about their commitment to limited partnerships. Oil and gas drilling partnerships fell 30 percent in the past year.
Laurence Rossback, vice-president for tax-advantaged investment at Drexel Burnham Lambert Inc., says: ''People with a well drilled in 1981 expected to get still be profitable, investors are disappointed.
Despite such discouraging recent events, however, packagers, promoters, and brokers, as well as more neutral professionals like accountants and tax lawyers, are surprisingly optimistic about the prospects for limited partnerships in 1983 . While no consensus emerges, experts predict the limited partnership field will strengthen slightly.
One staunch optimist is Edward Mendlowitz, partner in the New York accounting firm of Siegel & Mendlowitz. He insists there will be more demand than ever for sheltered limited partnerships next year, and attributes the swelling interest to ''the new tax law's effects next year. The kind of people that would normally have had professional corporations and would have sheltered their income through their pension plan can no longer do that. They have to seek new methods.'' Mr. Mendlowitz says he thinks they will be actively investing in shelters next year.
Furthermore, he argues, more stringent IRS scrutiny of tax shelter promoters and unallowable costs will ultimately give prospective investors more confidence.
But for everyone drawn into the limited partnership field by the tax law, there will be others who shy away. Since tax rates are being reduced, fewer people may require shelters. And the revamped alternative minimun tax may scare some investors away.
Ranking the various types of shelters as to economic appeal is a knotty problem.
Take real estate: While some observers like Arnold Rudoff, the California-based publisher of the Limited Partner Letter, indicates that much of the office market is overbuilt, a counterargument is put forth by Stephen Blank, vice-president and real estate syndicator at Kidder, Peabody & Co. Mr. Blank insists: ''Each deal must be analyzed on its own merits. Investors must investigate the local market. While some areas are overbuilt, some are are still very attractive. And some areas within a specific city may be great and others rotten.''
Mr. Rudoff warns investors to steer clear of partnerships formed to construct commercial properties. But he indicates that some partnerships will be able to buy up commercial real estate at bargain prices as developers are forced to unload. If held for long enough, such properties could produce enticing returns.