The classic old-style shelters took advantage of several elements in the tax laws, but essentially they relied on a high degree of debt financing (or leverage), accelerated depreciation and the conversion of ordinary income into long-term capital gains.
Say, for example, you agreed to invest $10,000 a year for five years in a real estate limited partnership that planned to build a new office building. The deal's promoter--the general partner--took your $10,000 and went out and borrowed an additional $40,000, using your pledge of future payments as security for the loan. He then used that $50,000 as a 20% down payment on a construction loan for the office building.
Thus, with an investment of only $10,000, you would own a $250,000 share in the office building project (minus the promoter's fees, which could be substantial). You would also have the right to deduct a great many expenses from your taxable income--especially mortgage interest, depreciation and some of the promoter's fees. (A syndicator's marketing expenses were not deductible by the limited partners.)
A deal such as this had heavy up-front costs, and substantial revenue may not begin to appear for several years. It may take a couple of years to construct the office building; it may take another year or two to lease out the space. But during this whole time, you have paper losses to write off.