Mark Kohler warns against chasing tax write-offs that don't make money. The 1970s savings-and-loan crisis happened because investors bought failing properties just for deductions. Reagan's 1984 Tax Reform Act added rules requiring real involvement and financial stake to prevent this.
So many taxpayers let the tax tail wag the dog. They're just chasing the next cool tax strategy and literally have blinders on and don't care if it makes money at the end of the day. 'Cause they're saying, if I spend X and I get a tax write-off better than that, I don't care if it makes money. Do I need to go back to the savings and loan crisis in the 1970s where people were buying properties that were complete failures just to chase a write-off? And then Ronald Reagan, put a stop to that with the 1984 Tax Act. That's when material participation was first introduced to the tax code. Investors could not just go buy a crappy building funded by a savings alone and take a write-off and have no business involvement. Wrong. And then Ronald Reagan added to that, you have to have basis. You have to have basis in the project. You just can't— meaning recourse basis that you're on the hook for this. You can't just say I am and get a write-off. So that's where this all started.
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