Stalking Banks That Might Get Snapped Up

Investors scrambling for tax shelters under the new tax law may find relief in shelter of a different sort--housing for the needy. The new law brings back the low-income housing tax credits created by the Tax Reform Act of 1986 but allowed to expire on June 30, 1992. Developers earn the credits, granted in annual allotments over 10 years, by building or renovating apartments for people of modest incomes.

Syndicators such as Arcand, Boston Capital, and Richman Group bundle the credits into partnership deals peddled to corporations and individuals, typically through major Wall Street firms. The limited partners, in turn, can use the credits to shave their income taxes; $1 in credits is worth $1 off their tax tab.

Uncle Sam straps annual limits on individual taxpayers. Most folks can only offset the "deduction equivalent" of $25,000 in ordinary income each year. So if you are in the 36% tax bracket, the maximum you can save with the credits each year is $9,000.

The Boston Capital Tax Credit Fund III limited partnership is a typical offering. You must put up at least $5,000--around $60,000 is the maximum--to earn a 10-year stream of tax breaks from low-income housing complexes owned and operated by partnerships the fund invests in. Boston Capital's objective is to provide an annual yield of 14% to 16%, averaged out over the 10-year credit period. The returns reflect the tax credits and assume you'll get back your investment after 10 to 15 years. The return shrinks to around 8% if you don't recoup your investment.

The investments are not for everyone. You should make sure you will have income tax to offset, warns Thomas Tracy, a partner at KPMG Peat Marwick. Unused credits may be carried forward. The partnerships also lack liquidity: You'll have trouble bailing out in a pinch. Moreover, since the credits cannot be used to offset the alternative minimum tax, you should compare both regular and AMT liabilities before buying into a deal.

The apartments must adhere to complex federal regulations. A certain percentage of rental units must be occupied by tenants with incomes below specified levels. If properties fail to comply, the government can recapture a portion of the credits you've already taken, and tax breaks will be lost if there's a bank foreclosure. At that point, you might wish you had sought shelter in a tax-free municipal bond.

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