The financial planner we just saw encouraged us to buy a low-income tax credit fund to reduce our taxes today and provide income in 10 years when we retire. Good idea???
Good idea for the planner. He probably gets at least 7% and maybe 10% up front. Congress has indeed passed law allotting tax credits over 10 years for low income housing projects. You can refile your taxes for the 3 previous years and claim credits, and if you can't take all your credits each year, you can carry them forward for I thought 10, but somebody here corrected me that you can carry them longer than that. The problem is the alternative minimum tax. If you live in a high state-tax state or have a bunch of other preference items, the amount you can take each year of your tax credits is quite a bit less than you've been led to believe. I bought one of these in 1992. I paid into it over the first 5 years, and the credits are allowed over 10 years. It pays about $7000 yearly, but I have some $18000 accumulated that I haven't been able to take. I figure I'll be able to use the accumulation before the period over which I can take them runs out. Study form 3800, which limits how much in credits you can take. If you have Turbotax or a similar tax program, plug in $7000 low income tax credit on form 3800 just to see how much the credit would actually reduce your taxes. You would be doing good in helping low income people have decent housing, so you may like the investment from an altruistic point of view. It is legal, and eventually you will come out ok, but it isn't as great as you may have been led to believe. Best wishes, Chris
I would advise not to buy into any deal whose main selling point is tax benefits rather than the underlying economic soundness of the investment. What Congress giveth this year can just as readily be taken away next year and there is no guarantee that you would be grandfathered after any change in tax law. I know from experience. In 1983 I purchased a low income housing realty partnership; the main selling points were large tax deductions in the up front years and income from the sale of the properties in later years. (Sound familiar?) Shortly thereafter, Congress decided that they were no longer interested in incenting low income housing and radically changed all the rules in mid-game. The deductions were classified as passive, and in my case, as a non direct owner of rental properties, became largely useless. Furthermore, because of the extensive regulation by government agencies of low income housing, the properties were not readily saleable under the new rules, so the partnership continued in existence much longer than was originally planned and the expected income stream from property sales never occurred. Until I finally sold this very illiquid investment earlier this year, it has been almost two decades of dead money and accounting headaches, and even after selling it and receiving practically nothing for it, I'm going to owe more in capital gain taxes on it than I am receiving for it's sale, because much of the accumulated passive losses over the years were used up to offset phantom income that the partnership generated and that I would have been taxed on over the years.So my advice, think long and hard on this one; once in, it's hard to get out, especially after they change the rules on you.WTR
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