For example, a taxpayer might purchase a rental property with a low down payment and offset his rental income with deductions for interest, taxes, and the maximum allowable depreciation. Generally, losses are generated in the first years of existence and passed through to investors, who sometimes achieve a complete return of their original investment through tax savings in the first two or three years. But the existence of a loss does not always indicate a tax shelter. A loss may also occur as a result of business operations or from an unusual event such as a casualty loss. The key element which distinguishes a tax shelter loss from a true business loss is the substance of the event which gave rise to the loss.
Taxes are deferred to later years.
Leverage is obtained through various financing arrangements. Deferral means the postponement of income taxes. The tax shelter allows the taxpayer to postpone or even avoid payment of taxes. The deferral of taxes is the equivalent of an interest-free loan from the Government, the economic benefits of which can be significant. An example of deferral is an IRA, your Individual Retirement Arrangement.