ijk@hropus.UUCP (Ihor J. Kinal) (02/26/86)
Since my income has gotten me to the point where Uncle is taking a substantial bite, I've been wondering about ways to reduce the bite (I'm already doing the usual things of IRA's,401K plans,3 deductions plus house, etc.). In particular, are there any LEGAL and STRAIGHT_PATH tax shelters (I'm not interested in triggering any IRS audits). Something that has caught my interest recently are RELPs (I'm not sure what the acronym stands for, possibly Real Estate Limited Partnerships), where one starts with a small investment (say $2500), and one gets back a tax deduction several times the investment (depending upon the the specifics, I believe one may be locked into investing a certain amount over the future, but not your entire fortune; so your loss is limited). I'm confused, however, about the details of how these really work (what in the tax laws allow you to claim a deduction for more than you put in??? Is it the depreciation allowances as well as the fact that most of the buying done with borrowed money??? And assuming Congress does change the depreciation allowance, will this cause RELPs to become less favorable? I suppose I should talk this over with an investment counselor, but the recent Consumer Reports article turned me off (most advisors just pushed whatever they were selling, not necessarily what was best for the client); besides, I would like to make an intelligent decision. So where can I research this topic. Money magazine?? Any good books?? Anyone out there who has done it, and anyone who has done it and been audited??? (AM I asking the right questions?? Why am I here... -) ). Thanx in advance. Ihor Kinal ihnp4!houxm!hropus!ijk
suhre@trwrba.UUCP (Maurice E. Suhre) (03/04/86)
In article <309@hropus.UUCP> ijk@hropus.UUCP (Ihor J. Kinal) writes: > >I'm confused, however, about the details of how these really work >(what in the tax laws allow you to claim a deduction for more than >you put in??? Is it the depreciation allowances as well as the >fact that most of the buying done with borrowed money??? And >assuming Congress does change the depreciation allowance, >will this cause RELPs to become less favorable? > There has been some confusion about tax shelters. I'm not a CPA, but the following may help you to know what questions to ask. The deductibility of mortgage interest is not a tax shelter. For example, if you pay out $10,000 in interest and save $3,000 in taxes, you have still *paid out* $7,000. The government has merely defrayed your costs. A tax shelter works because you can take deductions against ordinary income, and at a later date have those deductions show up as capital gains. Since the capital gains tax rate is 40 percent of the ordinary income tax rate, this can be quite a savings. There is also the second order effect of having the use of the money until the taxes are paid. The deductions usually come from having a depreciable asset, like an apartment or office building. Usually the owners will put 25% down (or so) but when the depreciation is taken, it is derived from the full price. That is, you get the depreciation from the bank's money. The complications arise because of the "at risk" clause which went into the tax code a few years ago, and also from the alternative minimum tax computations. The "at risk" clause says that you cannot take depreciation in excess of the amount you are "at risk" for (i.e. have signed a promissory note). However, residential real estate was exempted from the at risk clause. Presumably, this is to help keep the cost of renting an apartment down. The alternative minimum tax computation is a way of taxing the untaxed part of the capital gains (the 60 percent left over). Unless you have your ordinary income almost completely sheltered, it will not come into play. I would think that if alternative minimum tax is a consideration, you would not be reading this article for advice. If the above seemed to elementary, I'm sorry. One of the computer operators told me that he buys a new car every three years because he needs the tax write-off. I told him bull****. Usual disclaimers. Please view the above as an introduction to tax shelters and use it as a guide to ask questions to someone who is peddling such items. Finally, the commonly stated rule is don't invest in something if it doesn't make sense independent of tax considerations. Any tax savings should be viewed as "frosting on the cake". I believe this, but like almost everything, there could be exceptions. Remember, that as the tax rates get lower, tax shelter becomes less important. Maurice {decvax,sdcrdcf,ihnp4,ucbvax}!trwrb!suhre