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From: suhre@trwrba.UUCP (Maurice E. Suhre)
Newsgroups: net.invest
Subject: Re: Ways of Reducing Taxes (RELPs), etc.
Message-ID: <1886@trwrba.UUCP>
Date: Mon, 3-Mar-86 21:50:43 EST
Article-I.D.: trwrba.1886
Posted: Mon Mar  3 21:50:43 1986
Date-Received: Thu, 6-Mar-86 03:08:02 EST
References: <309@hropus.UUCP>
Reply-To: suhre@trwrba.UUCP (Maurice E. Suhre)
Distribution: na
Organization: TRW EDS, Redondo Beach, CA
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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

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