In 2004, he says, the investor was getting just 95% to about 105% of his or her investment in those tax credits. There simply is more competition for tax credits than when they first were enacted, he says.
If you assume the investor does not get any principal back from the funds, "at today's tax credit rates, that's an internal rate of return of about 1%," Fred says. That return, he stresses, figures the time value of money. "That's a very low return for 15 years."

Fred notes that the secondary market is very thin. "Our firm policy is not to participate in the secondary market for these vehicles," he adds. "Typically, they're not sold with a current prospectus. We don't want to run afoul of
securities laws."

Fred's network still offers these low-income housing tax credit funds through ING broker-dealers Multi-Financial Securities, Financial Network Investment Corp., PrimeVest and ING Financial Partners. ING offers Boston Capital and WNC low-income housing tax credits, he says, due to the firms' very stringent policies and procedures. 

However, he cites a number of issues with low-income housing tax credits. For one thing, the 1986 tax code change limited deductibility of passive losses for the individual investor.
The programs continue to generate passive losses, but a current investor can't use them unless they can offset specific passive income. This rule does not apply to corporations. "Typically, we advise [individual] clients that at some point, the assets are going to be disposed of, which may lead to a capital gain," Fred says. "In that case, suspended passive losses can be used to offset income at that time."

The low-income housing real estate limited partnership programs, he says, still are attractive, say, for someone who has entered into an installment sales contract to sell a business. Each year, he notes, the tax credit could wipe out the tax liability.

Fred says they may be perfect vehicles for new retirees making substantial withdrawals from large qualified plans to slash their tax bills. "If you have a known series of taxable gain items coming in your future, this is a way to partially offset some of this liability," he says. "Too often, an advisor will put a client into this for a current-year tax issue, without looking at the longer term."

There are other issues with these funds, Fred says. Based on the formula at this writing, the maximum tax credit an individual can get is just $9,900 a year. Meanwhile the ultrawealthy, thanks to the widening tentacles of the alternative minimum tax, may not be eligible to use tax credits.

Getting a client's principal returned from an original investment in these funds is questionable, says Fred. "They (Boston Capital) actually go after the senior market and target retirees," he says. "They position tax credits as a way to offset the tax costs of minimum required distributions for qualifying accounts. They show year-by-year payouts beginning in 1989 through 2002."

In an example of one program, someone who invested $10,000 in December 1988 would have received $14,510 in tax credit returns through 2002, he notes. Two objectives were hyped. First, a 97.5% to 102.5% return on your money over ten to 12 years in the form of tax credits. "They've always hit that objective," Winer acknowledges.
The second objective, however, was preservation of principal and repayment after about 15 years. That's where the funds fall short, Winer says-particularly for senior citizen clients who may have a remaining lifespan not much greater than that. "You'd think the properties in the tax credit series started in the 1980s would have been sold or refinanced by now and principal would be returned to investors," Winer says. "The reality is it's not really happening that way. It's going very slowly."

Sy Garban, senior vice president at WNC & Associates Inc., another sponsor of public low-income housing real estate limited partnerships funds, stresses that clients need to assume they won't get their principal back. However, he says, WNC definitely has sold properties within its partnerships, and already has returned some proceeds to investors.