Burned-Out Tax Shelter

A real estate investment that was originally intended to provide large income tax deductions but no longer does. A Tax Shelter becomes less effective over time because deductions for accelerated depreciation are smaller in the later years of an asset's life and nonexistent when assets are fully depreciated, and interest deductions are smaller in the later years of mortgage life when most of the payment applies to principal.
Example: From Net Operating Income (NOI) of $1,000,000, deductions for depreciation and interest totaled $1,200,000 soon after acquisition, providing $200,000 of tax shelter. Twenty years later, however, interest and depreciation combined were $700,000, causing $300,000 of the NOI to be taxable. Since there was more taxable income than cash flow, this has become a burned-out tax shelter.