CAPITAL ACCOUNTS Increases to partner’s capital accounts

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Presentation transcript:

CAPITAL ACCOUNTS 704(b) & MINIMUM GAIN Presented by Brad Elphick, CPA, Novogradac & Company LLP

CAPITAL ACCOUNTS Increases to partner’s capital accounts Cash contributed Fair market value of property contributed Net of liabilities assumed by partnership Allocations of income or gain Decreases to partner’s capital accounts Cash distributed Fair market value of property distributed Allocations of loss or deduction, most credits

Partnership Agreement TAX CREDITS Partnership Agreement $ $ $ Developer Investor Limited Partnership Capital Account CREDITS LOSSES

Developer Investor Limited Partnership Capital Account CREDITS LOSSES

704(b)!!! $ CREDITS LOSSES Does not receive credits or losses 704(b) Issues $ Developer Investor Limited Partnership Does not receive credits or losses Cannot use credits or losses Must pay an adjuster to the Investor Capital Account CREDITS LOSSES 704(b)!!!

Minimum Gain What is it? How does it help a 704(b) problem? Assumed sale of asset at year end Assumed sale price of non-recourse debt plus $1 Gain is calculated Assumed Sale price less Net Book Value How does it help a 704(b) problem? Assumed Minimum Gain is allocated to partners Losses can continue to flow to partners with negative capital accounts Credits flow to the investor partner

Example of 704(b) problem 20X1 20X2 20X3 20X4 20X5 BALANCE SHEET LAND 20X1 20X2 20X3 20X4 20X5 BALANCE SHEET LAND 1,000,000 BUILDING 10,000,000 ACCUM DEP (1,000,000) (1,500,000) (2,000,000) (2,500,000) (3,000,000) TOTAL 9,500,000 9,000,000 8,500,000 8,000,000 PERM LOAN DEFERRED DEV FEE 500,000 LP CAPITAL 2,500,000 RETAINED EARNINGS INCOME STATEMENT REVENUE OPERATING EXP (500,000) DEPRECIATION NET LOSS

Calculation of Minimum Gain 20X1 20X2 20X3 20X4 20X5 LAND 1,000,000 BUILDING 10,000,000 ACCUM DEP 1,000,000) (1,500,000) (2,000,000) (2,500,000) (3,000,000) TOTAL 9,500,000 9,000,000 8,500,000 8,000,000 QNR DEBT (8,000,000) MINIMUM GAIN (1,000,000) (500,000) - LP CAPITAL BEGINNING BAL 2,000,000 1,500,000 500,000 NET LOSS ENDING BAL

LIMITED PARTNER IRC 704(b) REALLOCATION

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