If you invest in residential real estate that’s rented to tenants with moderate incomes, you can qualify for a tax credit–a direct reduction in your tax bill. You can earn this credit on your own but you’re probably better off in a limited partnership, relying upon the general partner to deal with all the requirements. Such partnerships are offered by some brokers and financial planners.
These federal housing tax credits are spread over 10 years. Often, the period will stretch to 11 or 12 years because it may take some time for a partnership to invest all of its capital.
You can expect an annual tax credit of roughly 10 percent per year. Thus, if you invest $10,000 in such a partnership, you’ll get about $1,000 worth of tax credits savings per year, for 10 years. Altogether, expect $10,000 in tax savings from a $10,000 investment.
The bottom line is that you’ll probably break even from the tax savings these deals offer. Any other proceeds you receive, from property sales or refinancing, will turn the deal into a money maker.