The following schedule outlines the six-year benefits to a limited partnership of an investment in a mid-sized hotel. It does not consider the appreciation of the value of the hotel, which would also be an investment goal. Note that the shelter's "crossover point" -- the time after which the investment produces positive, taxable income rather than deductible losses -- occurs in the sixth year. The basic set-up (while hypothetical, the figures are patterned after a recent actual acquisition) involves a $5-million property:

Land $ 500,000

Buildings 3,400,000

Furniture, fixtures, equipment 1,100,000

TOTAL COST $5,000,000

Down payment 1,100,000

Mortgage $3,800,000

In accordance with the Economic Recovery Tax Act (ERTA) of 1981, the buildings are depreciated on a 15-year, straight-line schedule. The personal property -- the furniture, fixtures, and equipment -- is depreciated on a 5-year schedule: 15% in year 1, 22% in year 2, and 21% in years 3, 4, and 5.

Year 1 Year 2 Year 3

Profit before debt service $586,300 $597,400 $642,500

and depreciation

Less: Interest 402,300 399,000 395,200

Depreciation 391,700 468,700 457,700

TOTAL $794,000 $867,700 $852,900

Taxable income or (207,700) (270,300) (210,400)

(tax loss)

Cash flow * (tax-free

through year 5) 152,000 163,100 208,200

Principal payments 32,000 35,300 39,100

Cash flow and principal 184,000 198,400 247,300

payments

Aftertax return to a $287,850 $333,550 $352,500

50%-bracket investor 26.2% 30.3% 32.0%

Year 4 Year 5 Year 6

Profit before debt service $690,100 $741,600 $796,900

and depreciation

Less: Interest 390,900 386,100 380,800

Depreciation 457,700 457,700 226,700

TOTAL $848,600 $843,800 $607,500

Taxable income or (158,500) (102,200) 189,400

(tax loss)

Cash flow * (tax-free

through year 5) 248,800 307,300 362,600

Principal payments 43,400 48,200 53,500

Cash flow and principal 292,200 355,500 416,100

payments

Aftertax return to a $371,450 $406,600 $321,400

50%-bracket investor 33.8% 37.0% 29.2%

* After adding depreciation and substracting principal payments

(Table courtesy of Philip J. Brookes)