CAPITAL ACCOUNTS 704(b)

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CAPITAL ACCOUNTS 704(b) MINIMUM
GAINPresented byBrad Elphick, CPA, Novogradac
Company LLP
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CAPITAL ACCOUNTS

• Increases to partners capital accounts
• Cash contributed
• Fair market value of property contributed
• Net of liabilities assumed by partnership
• Allocations of income or gain
• Decreases to partners capital accounts
• Cash distributed
• Fair market value of property distributed
• Net of liabilities assumed by partnership
• Allocations of loss or deduction, most credits

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TAX CREDITS



Developer
Investor
Limited Partnership
Capital Account
LOSSES
CREDITS
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Developer
Investor
Limited Partnership
Capital Account
LOSSES
CREDITS
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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
LOSSES
CREDITS
704(b)!!!
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Minimum Gain

• What is it?
• 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

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Example of 704(b) problem
      20X1 20X2 20X3 20X4 20X5
BALANCE SHEET BALANCE SHEET BALANCE SHEET          
LAND LAND   1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
BUILDING BUILDING BUILDING 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
ACCUM DEP ACCUM DEP ACCUM DEP (1,000,000) (1,500,000) (2,000,000) (2,500,000) (3,000,000)
    TOTAL 10,000,000 9,500,000 9,000,000 8,500,000 8,000,000
PERM LOAN PERM LOAN PERM LOAN 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000
DEFERRED DEV FEE DEFERRED DEV FEE DEFERRED DEV FEE 500,000 500,000 500,000 500,000 500,000
LP CAPITAL LP CAPITAL LP CAPITAL 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000
RETAINED EARNINGS RETAINED EARNINGS RETAINED EARNINGS (1,000,000) (1,500,000) (2,000,000) (2,500,000) (3,000,000)
    TOTAL 10,000,000 9,500,000 9,000,000 8,500,000 8,000,000
INCOME STATEMENT INCOME STATEMENT INCOME STATEMENT INCOME STATEMENT        
REVENUE REVENUE REVENUE 500,000 500,000 500,000 500,000 500,000
OPERATING EXP OPERATING EXP OPERATING EXP (500,000) (500,000) (500,000) (500,000) (500,000)
DEPRECIATION DEPRECIATION DEPRECIATION (500,000) (500,000) (500,000) (500,000) (500,000)
  NET LOSS NET LOSS (500,000) (500,000) (500,000) (500,000) (500,000)
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Calculation of Minimum Gain
    20X1 20X2 20X3 20X4 20X5
LAND   1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
BUILDING BUILDING 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
ACCUM DEP ACCUM DEP 1,000,000) (1,500,000) (2,000,000) (2,500,000) (3,000,000)
  TOTAL 10,000,000 9,500,000 9,000,000 8,500,000 8,000,000
QNR DEBT QNR DEBT (8,000,000) (8,000,000) (8,000,000) (8,000,000) (8,000,000)
MINIMUM GAIN MINIMUM GAIN (2,000,000) (1,500,000) (1,000,000) (500,000) -
LP CAPITAL LP CAPITAL          
BEGINNING BAL BEGINNING BAL 2,000,000 1,500,000 1,000,000 500,000 -
NET LOSS NET LOSS (500,000) (500,000) (500,000) (500,000) (500,000)
ENDING BAL ENDING BAL 1,500,000 1,000,000 500,000 - (500,000)
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LIMITED PARTNER IRC 704(b) REALLOCATION
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Questions???

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