Deferral:  Under the deferral concept, deductions are accelerated in order to reduce your tax liability in the early years of the transaction. By shifting the tax liability to later years, the federal government is, in essence, giving you an interest-free loan as an inducement to invest in certain items. It's repaid when the investment either produces net taxable income, is sold, or is otherwise disposed of.

Leverage:  It's an investment art form. Leverage means that you borrow money to pay expenses on an investment that offers an accelerated deduction schedule. It's even better if you can arrange the deal so that you're not personally liable to repay the loans and your personal investment risk is limited to your equity investment. The IRS limits the availability of these so-called "non-recourse" type loans, however.

Conversion:  The third element involves converting ordinary income to capital gains when the investment is disposed of or is sold. This sleight-of-hand allows investors to deduct the portion of the gain reflecting the accelerated deductions as regular income, but then report any profits at the lower capital gain rate. Long-term capital gains are taxed at a maximum 20 percent rate (26 percent for real estate investments to the extent of depreciation recapture). Deduct at 39.6 percent and report income at 20 percent and you are in tax heaven.