(FORTUNE Magazine) – THE NEW tax reform law effectively demolishes tax shelters. Gone from the financial landscape will be those offerings -- for everything from windmills and almond groves to movies and office buildings -- whose profitability depends primarily on tax breaks. A few shelters will be left standing for the rest of 1986, but thereafter most will crumble, leaving battered investors digging their way out, sometimes for years. Says Stephen Corrick, a tax partner in the accounting firm of Arthur Andersen: ''Tax shelters are going the way of the dinosaur.'' Tax shelters have flourished in recent years as more and more Americans have sought relief from high tax rates. Shelters come in many shapes and sizes, but their essential purpose is the same: to reduce investors' taxes by generating accounting or ''paper'' losses that will offset otherwise taxable income. Typically tax shelters are structured as limited partnerships, which restrict an investor's liability to the amount he puts into the deal. Real estate shelters, by far the most popular kind, are designed to throw off big losses from interest, depreciation, and other tax breaks in the early years. Indeed, shelter owners often save $2 or more in taxes for every $1 they invest. Hence an investor in the top 50% tax bracket today is assured of getting his money back quickly in tax savings. Within five years a well-designed real estate shelter should be producing rental income. By the tenth year the partnership should be ready to sell the property for a tidy capital gain. The new law, however, leaves most shelters as unprotective as a roofless hut in monsoon season. To begin with, lower tax rates reduce the value of all sorts of tax breaks. At today's top 50% tax bracket, an investor gets 50 cents in tax savings for every dollar he writes off. But at a rate of 28%, that same dollar of write-off would save him only 28 cents. Says David Berenson, a tax partner in the accounting firm of Ernst & Whinney: ''It's great when Uncle Sam shares 50% of your losses, and terrible when he takes 50% of your earnings. Now the tables are turned. He'll take less of your income, but also share less of your loss.'' Berenson and other investment experts agree that lower rates will tilt tax incentives sharply away from shelters toward income- producing investments. Moreover, the new law severely limits investors' ability to use tax shelter losses to reduce ordinary taxable income. To zero in on shelter owners, Congress invented three rather arbitrary categories of income: ''active,'' from wages and salary or the equivalent; ''portfolio,'' from stocks, bonds, and other financial investments; and ''passive,'' from businesses in which the taxpayer does not ''materially participate'' -- that is, limited partnerships and most rental real estate. Starting in 1987, losses from passive investments entered into after the President signed the tax measure will be deductible only against passive income. Losses on passive investments made before that date will be partly deductible against nonpassive income until 1991: 65% in 1987, 40% in 1988, 20% in 1989, 10% in 1990. The remaining losses will be deductible only against passive income, and most shelter owners just don't have much of that.

Other provisions of the new law that will take at least part of the roof off particular kinds of tax shelters include: Repealing the investment tax credit, the cornerstone of many equipment leasing deals. Slowing depreciation schedules, thereby reducing returns on equipment leasing and real estate investments. Limiting most real estate write-offs to the amount of cash or secured debt directly invested in a deal. Cutting back targeted tax credits for research and development, low-income housing, and rehabilitating old structures. Expanding the alternative minimum tax, which is essentially a tax on tax write-offs, or so-called preferences. Besides raising the minimum tax rate from 20% to 21%, the new law expands Congress's definition of preferences to include all passive losses. Hammered hardest by the new law will be investments where returns were based almost exclusively on tax write-offs, not income or capital appreciation. Consider the sad saga of the Sunnymead Plaza Limited Partnership, a deal launched in 1985 to build two shopping centers in California and Missouri. Each partnership unit cost $307,500, which investors agreed to pay in seven yearly installments. So far Sunnymead investors have contributed $53,000 per unit, and still owe $254,500. From the beginning they knew the deal would produce no significant cash flow or capital gains for many years. The selling point was the promise of $681,419 per unit in deductible losses, mostly from depreciation and mortgage interest. These losses would save someone in the ! 50% bracket $340,710 in taxes over the seven-year span. But the new law's lower tax rates and slimmer deductions will slash a top- bracket Sunnymead investor's tax savings by two-thirds, to $111,013. During the seven-year pay-in period, the investor will lose $191,787. Over the entire 35-year life of the deal, he will barely break even. What can investors do? If you are shelter-free, count your blessings. But if you are locked into a deal like Sunnymead, don't panic. There are ways to limit the pain, if you are willing to do some heavy lifting. Your alternatives, and the best of the experts' advice about them: JUST WALK AWAY. This may look tempting for Sunnymead-style investors, but walking away carries costs. The Internal Revenue Service will demand repayment of all tax deductions already taken in the deal. Moreover, investors who signed promissory notes as part of their partnership agreement may find themselves sued by their syndicator or the bank the syndicate assigned its mortgages to. In short, welshing will rarely be worth the price. SELL OUT. This sounds great, but the odds are you won't be able to find a buyer except at a deeply discounted price. If the assets the partnership owns have underlying value, as most real estate has, the wiser course may be to hunker down, wait for appreciation, and take the capital gain when the partnership dissolves. But if the partnership owns nearly obsolete computers or a ship whose value has plummeted, you will want to focus on ways to use or limit the tax losses generated by the deal. RESTRUCTURE. Many partnerships are already thinking about easing investors' pain by renegotiating their financing at today's lower interest rates. Other syndicators are talking about offering limited partners the opportunity to prepay future contributions. This would enable the partnership to reduce its borrowings. SHELTER YOUR SHELTER. If all else fails, the best solution for investors stuck in rotting shelters is to shop around for limited partnerships that will generate passive income to deduct those passive losses against. In anticipation of tax reform, the financial community has developed many such products. Indeed, sales of income-oriented public limited partnerships hit $7.6 billion last year, up from $4.9 billion in 1984. The new law is expected to accelerate that trend. Says Berenson: ''This will be the hottest new investment arena.'' Fastest growing among these income producers have been mortgage loan partnerships, in which investors pool cash to buy mortgages that then generate interest income. Pretax returns have ranged from 8% to 10%. Sales climbed 35% during the first seven months of 1986, compared with the same period of 1985. Also growing in popularity are partnerships in which investors buy income- producing real estate. These partnerships have been generating pretax returns of 8% to 9%. For this year a few sturdy shelters remain. ''No. 1 for 1986 is oil and gas,'' says Mark Brumbaugh, a tax partner in the accounting firm of Coopers & Lybrand. Investors in an oil and gas drilling partnership can expect to write off 80% or more of their investment against ordinary income in 1986, while rates are still high. If oil begins to flow next year, the income will be largely offset by depreciation and depletion allowances; the rest will be taxed at the new lower rates. Moreover, if oil prices rise, as many analysts expect, investors could hit a financial gusher in later years. Some oil and gas deals will remain attractive even for those who invest after the first of the year. Thanks to its economic woes and political muscle, the oil and gas industry won a special break from Congress: Losses from wells in which an investor has a ''working interest'' can still be deducted against active and portfolio income. However, in this context a working interest means that the investor must assume unlimited liability, which should discourage the cautious. Today's more aggressive investors are also hoofing it toward cattle feeding shelters. By prepaying the expenses of feeding, participants in such deals can use their write-offs against ordinary income this year, while rates are still high. No income is generated until the fattened cattle are sold in 1987 or 1988, when rates will be lower. The biggest risk is the sale price of beef on the hoof: Prices can change dramatically in response to unpredictable shifts in supply. Another danger is the IRS. Warns Warren Shine, a tax partner in Ernst & Whinney: ''Few of these deals make money on a pretax basis. If investors can't prove their intention to make a profit, the IRS may end up disallowing the deductions. This is very risky.'' MOST OTHER tax shelters are longer-term deals that lock investors into payments over several years. Investing in such partnerships today would be unwise. Robert A. Stanger, president of the investment research firm that bears his name, predicts a fade-out for private placement partnerships, which are usually confined to a small number of wealthy investors. By Stanger's estimates these partnerships, typically multiyear tax shelter deals, will drop from a peak of $10.5 billion in 1984 to around $4.5 billion this year, and only about $1 billion in 1987. By 1988, he believes, tax reform will have eliminated such shelters altogether. With so many of the familiar avenues for sheltering income now foreclosed, the savviest investors will take Congress's tax reform message to heart. They will start going for real profits instead of crying ''Gimme shelter.''