Real estate investment decisions based chiefly on tax advantages became a thing of the past with the 1986 tax law changes.

"In the new environment, the tax benefits are relatively small," said Kenneth T. Rosen, manager of real estate research for Salomon Brothers Inc. Investments should be made "only from the economic point of view. People should be looking at the economics."

In real estate, the term "economic" refers to a deal that makes financial sense independent of tax considerations.

Some real estate professionals are expecting investors to turn to real estate from the stock market after the market's October dive.

"Real estate has never performed the best on an annual basis. Alternatively, it also never performed the worst. It tends to be ballast in a portfolio," said M. Leanne Lachman, managing director of Schroder Real Estate Associates, which acquires and manages property for institutional investors. "It is a fixed asset; the value does not drop overnight. It's something an individual should seriously consider."

The most important real estate investment for individuals is a home, several experts said. Mortgage interest and property tax deductions are among the few benefits remaining after the 1986 tax changes eliminated most of the generous benefits the real estate industry had enjoyed for years.

"Home values should go up, certainly at the inflation rate, and in the Washington area they should go up above inflation," said Lachman. "With the current tax law you can deduct mortgage interest for two homes, so a second home is also a possibility."

A vacation home that is rented out some or all of the time also provides tax deductions, but calculating whether rental is to your advantage is more complicated now than before the 1986 tax law went into effect. Although how often owners use a vacation home has always been a factor in its tax treatment, it is now "more important than ever to understand and plan ahead how a second home will be used during the year," said Anne L. Stone, a partner in personal financial planning at Peat Marwick Main & Co.

Owners who use a vacation home for 14 days or less -- or for a period equaling no more than 10 percent of the total number of days the property was rented, whichever is greater -- must consider it rental property for tax purposes. The rental income is taxable but expenses such as utilities, interest, taxes, repairs and insurance are deductible, and the property can be depreciated at a rate of 3.6 percent of the building's value each year over 27 1/2 years.

A family vacation property that is rented out usually does not generate much income, however, and if the deductible expenses add up to losses, these cannot be used to shelter other income as they could before the tax law changes.

Family use in excess of the 14-day, 10 percent limits makes a vacation property a residence under the Internal Revenue Service's definition. In many cases the mortgage interest deduction available for residences is more valuable to owners than the rental property depreciation and deductions.

The provisions for depreciation and expense deductions cover rental apartment properties. Apartment buildings "are very attractive investments where vacancy rates are tight and that certainly includes Washington," Rosen said.

Much of the investment in apartment buildings is by institutions, but in some areas individuals can find good deals.

Older, deteriorated buildings and large houses that can be turned into three or four units can still be found in the District, said local rental property owners. A "modest" renovation can produce a profitable rental property or resale, said one local property owner, though in the District rent control can be a problem.

"Apartment buildings are perfectly fine investments, but people must understand that you're then in the real estate business," Lachman said. "Being a landlord is an enormous amount of work, especially in small apartment buildings where tenants call you in the middle of the night."

The losses from depreciation and the deductible expenses of owning and operating rental property can be used by some owners to shelter taxes on other income. People who earn less than $100,000 a year and actively manage their rental property can deduct up to $25,000 in losses from the property against salaries, stocks and other portfolio income. Those who earn between $100,000 and $150,000 can deduct real estate losses in amounts that diminish as earnings increase, and after $150,000 no deductions are allowed.

Before the 1986 tax law changes rental property owners -- both those who owned property directly or as limited partners in real estate investment partnerships -- could use losses from depreciation and expenses to offset taxes on income from other sources. These deductions were sharply limited by the tax code revision, spawning a demand for what the real estate industry calls PIGs -- or passive income generators -- to offset real estate losses that can no longer be used to avoid taxes on other income.

A recent forecast of 1988 real estate trends said the PIGs, usually limited partnerships, have been disappointing because "many failed to meet critical tax-code requirements and others may be suspect."

They may be more in demand next year, however, because investors will not realize "how much they need passive income until they analyze their '87 tax returns," according to the forecast, prepared by the Real Estate Research Corp. "Then we could see a mad scramble for all-cash or high-proportion cash deals that will produce income to balance their passive losses."

The tax code provides for tax credits for those who invest in some low-income housing deals. "Low-income tax credits may be interesting to the relatively small investor," said Charles L. Edson, a Washington lawyer specializing in real estate and low-income housing.

An investor can buy into public or private limited partnerships formed for financing low-income housing. The law permits a "dollar-for-dollar credit up to about $7,000 a year," not enough to be useful to large investors, he said. Edson described a public offering being made now for minimum investments of $25,000, which will provide tax credits worth $6,000 to $7,000 a year for 10 years.

"The tax credits, if structured right, are a good way for an individual to get a nice return and be doing something he believes in," said Bart Harvey, deputy chairman of the Enterprise Foundation, a nonprofit organization specializing in low-income housing. He warned against salespeople who say you will receive cash flow and that the property will appreciate, because the tax advantages usually are the major, and often only, benefit in a low-income housing investment.

Using the low-income tax credits is difficult "because they are very complicated. It takes a very sophisticated group to put together such a transaction," Harvey said. He said a major investment banking house and a large nonprofit organization have just started selling units in a low-income housing investment partnership, and said these are the types of participants to look for.

Many real estate professionals recommend limited partnerships that invest in commercial and residential property, but it is difficult for individuals to determine if a deal is sound. "It's like buying a rocket ship from a used-car salesman. He'll promise you it will get to the moon but you have no way of knowing whether it will or not unless you're a rocket scientist," said one critic of the deals.

Marvin Burt, a financial planner in Bethesda, describes himself as "bullish on real estate" and said he thinks that carefully chosen limited partnership interests have a place in an individual's investment portfolio. He prefers the limited partnership vehicle because he doubts that many of his clients have the time or the skills to manage real estate directly.

But, he says, "I wouldn't touch about 98 percent of the partnerships I've seen."

Before the law changed, many limited partnerships were structured as tax shelters, in which investors could use losses generated in the early years of the investment to offset taxes from other income such as salaries, stocks and other portfolio investments. With the tax shelter advantages gone, limited partnerships must stand on their own economically.

"I think the best thing is to go with the largest firms that have been in the {limited partnerships} the longest, with 15 to 20 years' experience and know how to manage property," Lachman said. "The single most important thing is property management."

Investors put about $4.7 billion into real estate investment trusts, or REITs, in 1986. The total is expected to drop to about $4 billion in 1987. REITs are a mutual fund-like vehicle in which fund managers buy property or mortgages, or both.

REITs have not performed as well as predicted because of the impact interest rate changes have on the value of the real estate. Over long periods, however, "REITs have done very well, especially equity REITs," outperforming the stock market and government and corporate bonds, according to the Real Estate Research Corp. report. Equity REITs are invested in property only.

Real estate investments fare better in periods of high inflation -- such as the late 1970s and early 1980s, when interest rates soared -- but the stock market becomes more attractive to investors when interest rates drop and during periods of recession.

Overbuilding of office and other commercial properties, resulting in high vacancy rates in many areas of the country -- and lower earnings -- should make investors wary of REITs in 1988.

Lachman advised avoiding REITs "because ... you really are in the stock market. They're publicly traded shares, so if the stock market does an across-the-board decline, you can go down with it" even though the property itself has not lost value.

For the more adventurous, some experts are suggesting investments in shopping centers. More than half of about 90 real estate experts questioned by Real Estate Research Corp. put retail properties, particularly shopping centers, at the top of their lists of good investments in 1988.

But, like most real estate investments, shopping centers will not be as good a deal next year as they have been in 1987, the experts said. Many "investment grade" regional malls were purchased in 1986 and 1987, and bargains will be harder to find, according to the research organization's report.

Population projections indicate that there will be a large body of customers for retail stores in the future. "Half of the working population will be in their peak earning years in the early 1990s, creating a strong retail environment," according to the report. "Greater spending power should lead to demand for more retail space and renovations of existing centers." Shopping malls are likely to grow in popularity because of the increasing number of two-earner and single-person households with little time to shop, according to the repor