For years, Congress has extended very powerful tax credits to attract investment into areas that Congress wanted to promote. Tax credits are about 3 times more valuable than a tax deduction. When you get a tax deduction, each dollar of deduction saves an average tax payer about 33 cents in taxes. But tax credits are direct offsets to your taxes--each dollar of tax credit saves you a dollar in taxes. For the last several years, Congress has been offering tax credits for investments in affordable housing.
As a result, investors have available a number of funds available that invest in such properties (typically apartment complexes) and pass on all the benefits of property ownership including the tax credits. There is a limit to how much of these tax credits you can use however. You can shelter up to $25,000 of income annually with credits. For most investors, an investment of approximately $64,000 will generate the maximum allowable amount of credits ($7,000 per year for an average taxpayer).
Here's how a typical investment pans out. The investor invests $64,000. Each year, for the next 10 years, he receives $7,000 in tax credits, a total tax savings of $70,000 on his $64,000 investment. Hopefully, the properties in the fund have done well and the investor may receive rental income and appreciation on his investment also. But even if the properties in the fund perform below expectation, this is one of the few investments where the tax credits alone will more than refund the investors total investment.
Who are these investments suited for? Generally for investors wanting to pay less taxes and currently paying $20,000 or more in annual taxes with a net worth of $250,000 (exclusive of residence). Additionally, the investor must be able to comfortably afford the illiquidity of a long term investment. If you've been looking for the last powerful way to cut taxes, call for a brochure and prospectus.