The tax-shelter appeal broadens, but IRS keeps a close watch
For most of the major-league tax shelter games, the admission price is pretty steep, easily in the five- or six-figure range. 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 limited partnership shelter offerings. Investments in real estate, followed closely by those in oil and gas, remain the most popular.
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.
Companies packaging 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 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 their prospectuses with the Securities and Exchange Commission (SEC). This registration affords some protection for investors but does not indicate tacit approval for the operation.
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, or 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, fattening the annual deductions.
Private placement programs outnumber public programs and generally provide higher returns. But private programs have disadvantages. For one thing, they are highly illiquid (there is no public market), meaning that getting one's money before the syndication has run its course may be a problem. A few partnerships do offer a trading market.
Another concern, apart from unexpected changes by Congress, is the Internal Revenue Service, which is keeping a watchful eye on all tax shelters.
However, in most cases only private offerings specify exactly which building will be purchased or where wells will be drilled. Private placement sponsors tout this distinction as a major selling point.
You must meet certain financial criteria to invest in a public shelter program. Generally, you must have $20,000 in gross income plus $20,000 in net worth (net worth in these offerings always is exclusive of house, furnishings, and cars), or $75,000 in net worth. Higher risk ventures have higher standards.
Usually, only a licensed broker can legally sell you a partnership and should be able to supply facts to back his opinion about a shelter program.
Several companies sell ratings, performance data, and newsletters on the subject to brokers and financial advisers, and you should consult them. One is Stanger's company, named after him, in Fair Haven, N.J. Another is Kenneth Leventhal & Co., in Los Angeles.
If you're just beginning to invest, you may want to stick with a large, reputable firm that does a lot of business in public limited partnerships.
A few of the largest are: JMB Realty Corporation, Chicago; Balcor/American Express Inc., Skokie, Ill.; Consolidated Capital Corporation, Emeryville, Calif.; Fox & Carskadon Financial Corporation, San Mateo, Calif.; and Integrated Resources Inc., New York.
Investors should be aware that yields from partnerships are down from their robust highs of 20 percent to 25 percent a few years ago, to 5 percent to 7 percent, with eventual capital gains and tax benefits the primary goals.
Because of still high interest rates, making it difficult to raise borrowing money, ''sponsors will have to work harder to match their past results,'' says Leventhal's Stephen E. Roulac.
Investors should be wary of year-end investments offering write-offs as large as 8 to 1. Some financial advisers say that even late-year offers with write-offs as low as 2 to 1 should be spurned because of the inability of most people to investigate the economic aspects of the transaction in this brief time frame. The best time to invest in these vehicles is early in the year, to get depreciation and interest deductions for nearly the full year.
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.
Echoes Howard T. Slayen, a tax partner in the Palo Alto, Calif., office of Coopers & Lybrand: ''Clearly, in today's business and tax environment, if an investment does not have economic merit, and the IRS is increasingly challenging these investments, investors can be liable for sizable amounts of additional tax , interest, and possible penalties.''