Massive Tax Shelters Are No More

TAX shelters used to have hair on their chest. Investors could brag about their investments in horse breeding farms, oil and gas wells, coal mines, movies, or research and development projects. Sometimes a $50,000 investment could be muscled into a $250,000 deduction.

Today, by comparison the few tax shelters that exist are wimps.

Gone are the big deductions, sacrificed for a lower income-tax rate. ``Congress decided to eradicate a problem with a massive nuclear attack which killed not only the enemy, but the wildlife and good things as well,'' says Gerald Portney, a tax partner with KPMG Peat Marwick in Washington.

Now, Congress allows only tax shelters involving housing, oil and gas, and a very restricted real estate investment.

The housing investments are restricted to low-income projects or efforts to rehabilitate older buildings. In both instances, the taxpayer can receive up to a $7,000 credit per year against a tax liability. The tax credit can be used to offset income of any type.

These shelters, however, are still subject to the passive loss rule. In other words, if the losses exceed income, you cannot use the excess losses to offset income from other investments or wages. Passive investments refer to those usually made through limited partnerships or the rental of real estate.

After 15 years the housing can be offered back to a public housing authority, and, in 20 years, it can be sold as other than low-income housing.

``You can't realistically expect a real economic return,'' says Mark Brumbaugh, a national real estate partner with Coopers & Lybrand, a national accounting firm.

Tax-sheltered investments are also possible in oil and gas. Gone, however, are the days when investors could write off $3 to $5 for every $1 invested. Losses may still exceed income, but only if an individual accepts personal liability. Thus, if a disaster hits a drilling site, the general partner's assets may go to the creditors to meet any claims.

The final shelter is limited to individuals with up to $150,000 in gross income. They can deduct up to $25,000 from losses in rental real estate they actively participate in. For example, a loss can be taken on a condo that was bought as an investment, if someone else is renting it.