The tax-revision plan approved yesterday by the Senate Finance Committee would alter fundamentally the nation's real estate market by eliminating most of the tax benefits associated with investment in income-producing property.

The bill has sent shock waves through the real estate industry, officials of which claim it would cause huge losses for current owners of commercial and residential rental property. These officials warned that widespread loan defaults and bankruptcies and a virtual shutdown of new construction would follow passage of the measure.

If such defaults occurred, they could threaten the viability of already hard-pressed financial institutions in many parts of the country. Losses on real estate loans already have hurt a significant number of institutions.

The tax bill, primarily the work of committee Chairman Bob Packwood (R-Ore.), also would drastically change the status of a number of other heretofore tax-favored industries, such as equipment leasing, by making investment in them less attractive as a device to shelter from federal income taxes income earned from other sources.

The sweeping impact of the proposed changes is an example of how difficult it can be to withdraw tax breaks once they are in place. Usually when tax laws are changed, treatment of income flowing from investments already made is "grandfathered" -- that is, it continues to be treated as it was under the old law. In this case, the only acknowledgment of the problem is a phase-in period of four years.

The committee's goal in restricting tax benefits for real estate and some other industries was to discourage investment in tax-shelter deals that it regarded as economically unproductive. In addition, the panel needed to raise new revenue to offset losses from lowering tax brackets in the bill.

Tax benefits have long been an especially important force in the real estate industry. Since the early 1980s, these incentives have been so effective that they have sparked the construction of thousands of office buildings and apartments across the country, even in places with high vacancy rates and slack demand.

Because of the tax benefits, current owners were willing to pay more for the properties than if the tax-shelter benefits had not been available. Eliminating these benefits would immediately reduce the properties' market value by a substantial amount. The National Association of Home Builders estimates that the reduction could be as much as 20 percent.

"You're talking about real drops in property values," said Kent Colton, executive vice president of the NAHB. Colton said the tax changes also could curtail investment in new apartment buildings, reducing annual construction by about 350,000 units. About 50,000 single-family units also would not be built, he said.

In addition to the major capital loss, current owners of commercial real estate, including limited partners in real estate syndicates, would lose the ongoing tax shelter benefits associated with investments made in the past.

"We're not talking about prospective projects," Colton said. "We are talking about sombody who's out there and has investment s in real estate" and would now find he cannot take deductions he had counted on.

In many cases, said Scott L. Slesinger of the National Apartment Association, the situation may persuade an owner to "mail the keys to the bank" rather that continue to absorb losses he cannot deduct.

The bill would hit real estate investors in several ways. The most important would be a requirement that real estate losses could be used only to offset income from real estate and certain other "passive" investments in businesses in which the investor has no management role.

The real estate losses could not be used to shelter earned income or interest and dividend payments, but the losses could be carried forward to future years to offset real estate or "passive" income at a later time.

The sole exception would be that up to $25,000 in rental real estate losses could be used to shelter any type of income if the investor actively manages the property and his overall income is less than $100,000. The $25,000 exception would be phased out as the investor's income exceeded $100,000, disappearing at $150,000.

Under current law, most commercial and residential rental real estate investment packages are commonly structured so that large losses are generated in the first few years of ownership. The losses arise from large interest payments due on mortgages, accelerated depreciation allowances, insurance, taxes and other expenses.

Most investors can now subtract these losses from their other taxable income, so that a saving on tax payments reduces any out-of-pocket cost. In the long run, many real estate deals can show net income only if the building can be sold to a new group of investors for a substantial capital gain.

The Senate Finance Committee bill also would limit the creation of the so-called paper losses on real estate investments by requiring that the purchase price of a structure be written-off for tax purposes over 27 1/2 years for residential property and 31 1/2 years for commercial; at present, generally 19 years is allowed for both types of property.

Moreover, the "straight-line" method of depreciation would have to be used, meaning that only about 3.7 percent of residential projects', or 3.2 percent of commercial projects' costs could be written off each year. Under current law, more of the depreciation allowance may be claimed in the first few years a property is held.

The bill also would eliminate the present exclusion from income of 60 percent of long-term capital gains, so that such gains would be taxed in the same fashion as other income. Currently, with a top income tax rate of 50 percent, and only 40 percent of a long-term capital gain subject to tax, the effective maximum tax rate on these gains is 20 percent.

With the bill's proposed top income tax rate of 27 percent, the effective top rate on capital gains -- an important consideration in many real estate deals -- would go up seven percentage points. For an investor with capital gains who is in a current tax bracket with a rate less than 50 percent, the increase in the capital-gains-tax rate likely would be greater than seven percentage points.

The measure also would require that interest paid during the period a building is under construction be considered as part of its overall cost and written off over the full depreciation period. Currently, such interest payments may be written off over shorter periods and as such can be an important element of generating large losses in the early years of a project.

Of course, the overall reduction in the top income tax rate from 50 percent to 27 percent would directly reduce by nearly half the value of any tax deduction, including real estate or other tax-shelter investment losses.