Some questions to shed light on prospective tax shelters
Where do people go wrong in tax shelters? Here's what you should ask about a real estate deal:Skip to next paragraph
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* Where is the property? Do people want to live there?
* What is the building made of? Is the builder responsible and experienced?
* Will the building be physically attractive?
* Can the promoters require the investors to make further financial contributions down the line?
* Are the tax predictions realistic? Will the Internal Revenue Service challenge the deduction of expenses over the useful life of the depreciation process?
* Who are the promoters? Are they experienced and honest? What is their track record?
* How is cash flow divided among the investors and promoters?
* How are the promoters paid? Do they get their money all at once, or is their compensation in part dependent on successfully operating the venture?
* How is the building being acquired? How much cash and how much debt are involved? The higher the debt, the higher the economic risk.
* What are the financing arrangements? How much of the equity being raised is going into the down payment on the property? How much is going to pay the fees of the general partner and its affiliates?
* Is the partnership investing in property in areas where property is priced beyond its real value?
* Is the property acquisition overvalued? If so, depreciation and interest are in jeopardy, and substantial penalties may exist.
* Are claimed tax deductions sound, and is the timing of them right? Is there accrued but unpaid interest, and are proposed fees properly deductible?
* Is inflation needed to make the economics work?