Whatever tax shelter you consider, most programs fall under the structure of a public or private limited partnership. The object is to choose the program that will best fit into your overall financial plan.
Major-league investments in private limited partnerships often offer you write-offs three times your initial investment. The admission price of these ventures, however, is usually in the five- or six-figure range, out of reach for most investors.
Fortunately, a new breed of tax shelter - the publicly registered limited partnership - is gaining in popularity. These are less risky and easier to get into: Minimum investments are $5,000 and some deals permit you to put up as little as $2,000.
There are scores of available limited partnership shelter offerings - everything from timber to fast-food restaurants to research-and-development programs. But investment in real estate, including commercial, residential, and subsidized housing developments, remains the most popular, followed closely by oil and gas.
Robert A. Stanger, publisher of The Stanger Report, a tax shelter newsletter, estimates that sales of real estate public partnerships could total as much as $ 5.7 billion in 1984, with another $2.8 billion of limited partnerships sold privately.
Typically, companies that package real estate investments, called syndicators or sponsors, make money by buying properties and reselling them to groups of individual investors, called partnerships or syndicates. Sponsors get an up-front fee and an annual management fee, and they usually keep a share of the income and appreciation.
A partnership consists of a general partner and limited partners: The first is usually the sponsor or an affiliate and has financial responsibility and operating authority for the venture. The limited partners sit back and get the reports, the tax deductions, and, they hope, the checks.
There are two types of syndications - public and private. Sponsors of a public program must file prospectuses with the Securities and Exchange Commission (SEC). While this type of registration affords some protection for investors, it does not indicate any tacit approval for the operation. Public partnerships can often have 100 partners or more.
Private offerings are exempt, under one of several provisions, from registration with the SEC. Both public and private offerings tell investors what activity they intend to pursue, that is, purchase real estate, drill oil wells.
A partnership must own the property so that its tax benefits can flow through to the partners. The biggest tax benefit of real estate is depreciation, which lets an owner deduct the cost of a property from taxable income over a period of years. In 1981, the depreciation period for commercial properties was shortened to 15 years from 30 to 50 years. Mortgage interest is also tax deductible.
A concern, however, is that regulations affecting depreciation could be changed by Congress, a move that would hamper real estate tax shelters. Recently , Congress extended the depreciation period for real estate other than low-income housing and historical rehabilitations to 18 years, from 15 years, reducing the potential return on those investments.
While the new rule decreases the attraction of real estate to syndicators, it cuts into the fierce competition that pension funds face for prime properties. The provision makes more property available at a lower price. This, combined with rising interest rates, inflation fears, and a jittery stock market, has prompted a move back to real estate by pension-fund investors and smaller money managers.
Private placement programs outnumber public programs and generally provide higher returns than public partnerships. But private programs have disadvantages. For one thing, they are highly illiquid (there is no public market), meaning that getting one's money out before the syndication has run its course may be a problem. Some, although not many, public partnerships do offer a trading market.
The Internal Revenue Service, meanwhile, is keeping a watchful eye on all tax shelters to make sure investors do have money at risk and that the shelter is truly designed to reap economic benefits.
In most cases, however, only private offerings specify exactly which building will be purchased or where wells will be drilled. This distinction is touted by private-placement sponsors as a major selling feature of the offering.
Generally, the base suitability standard for a public program - the easiest one to get into - is 20-20-75. This means investors should either have $20,000 in gross income plus $20,000 in net worth (net worth in these offerings is always exclusive of house, furnishing, and cars), or $75,000 in net worth. Some ventures like wildcat drilling and movies have higher eligibility standards.
Usually, only a licensed broker can legally sell you a partnership, and one should be able to supply facts to back his opinion about a shelter program.
Which partnership should you invest in? That depends. If you're just beginning, you may want to stick with a large, reputable firm that does a lot of business in public limited partnerships.
The risk varies according to the type of property. Buildings under construction are riskier than those completed and rented. Stanger says the riskiest generally are hotels, which rerent every few days, followed by rental apartments, multi-tenant office buildings, shopping centers, and single-tenant offices and warehouses.
Investors should be aware that yields from partnerships are down from their robust highs of 20 to 25 percent a few years ago to 5 to 7 percent, with eventual capital gains and tax benefits the primary goals.
Because of still high interest rates, making borrowing more expensive, ''sponsors will have to work harder to match their past results,'' says Stephen E. Roulac, of Kenneth Leventhal.
As for the best time to invest in these vehicles, most experts prefer early in the year, to get the most out of depreciation and interest deductions.
Investors should be wary of year-end investments offering write-offs as large as 8 to 1, because often they are unrealistic. Some financial advisers say that even late-year offers with write-offs as low as 2 to 1 should be spurned because mmost people cannot look into the economic aspects of the deal in this short a time.
Real estate partnership programs advertising high write-offs are also likely to invite the scrutiny of the IRS, which has become more aggressive in pursuing so-called ''abusive'' shelters.
Always look at the economic and financial characteristics of the investment before you even take a look at the tax benefits. ''Limited partnerships, whether public or private, are investments. And like any other investment, potential benefits or reward carry financial risk,'' says William G. Brennan, publisher of Brennan Reports, an industry newsletter.