Presentation on theme: "CAPITAL ACCOUNTS Increases to partner’s capital accounts"— Presentation transcript:
1CAPITAL ACCOUNTS 704(b) & MINIMUM GAIN Presented by Brad Elphick, CPA, Novogradac & Company LLP
2CAPITAL ACCOUNTS Increases to partner’s capital accounts Cash contributedFair market value of property contributedNet of liabilities assumed by partnershipAllocations of income or gainDecreases to partner’s capital accountsCash distributedFair market value of property distributedAllocations of loss or deduction, most credits
5704(b)!!! $ CREDITS LOSSES Does not receive credits or losses 704(b) Issues$DeveloperInvestorLimited PartnershipDoes not receive credits or lossesCannot use credits or lossesMust pay an adjuster to the InvestorCapital AccountCREDITSLOSSES704(b)!!!
6Minimum Gain What is it? How does it help a 704(b) problem? Assumed sale of asset at year endAssumed sale price of non-recourse debt plus $1Gain is calculatedAssumed Sale price less Net Book ValueHow does it help a 704(b) problem?Assumed Minimum Gain is allocated to partnersLosses can continue to flow to partners with negative capital accountsCredits flow to the investor partner
7Example of 704(b) problem 20X1 20X2 20X3 20X4 20X5 BALANCE SHEET LAND 20X120X220X320X420X5BALANCE SHEETLAND1,000,000BUILDING10,000,000ACCUM DEP(1,000,000)(1,500,000)(2,000,000)(2,500,000)(3,000,000)TOTAL9,500,0009,000,0008,500,0008,000,000PERM LOANDEFERRED DEV FEE500,000LP CAPITAL2,500,000RETAINED EARNINGSINCOME STATEMENTREVENUEOPERATING EXP(500,000)DEPRECIATIONNET LOSS
8Calculation of Minimum Gain 20X120X220X320X420X5LAND1,000,000BUILDING10,000,000ACCUM DEP1,000,000)(1,500,000)(2,000,000)(2,500,000)(3,000,000)TOTAL9,500,0009,000,0008,500,0008,000,000QNR DEBT(8,000,000)MINIMUM GAIN(1,000,000)(500,000)-LP CAPITALBEGINNING BAL2,000,0001,500,000500,000NET LOSSENDING BAL