John and Beth form a limited partnership, Jumping Beans, L.P. John, the general partner, contributes $10,000 and is obligated to restore any deficit in his capital account on liquidation. Beth, a limited partner, contributes land, adjusted basis of $20,000 and a fair market value of $90,000, and is not obligated to restore any deficit in her capital account on liquidation. Jumping Beans borrows $1,000,000 on a recourse basis and constructs a rental building on the land for $1,000,000. Assume that the building has a 40 year recovery period and the note calls for payments of interest only for the first 10 years. The Jumping Beans partnership agreement (i) provides for the maintenance of capital accounts, (ii) provides that distributions in liquidation will be made in accordance with such capital accounts, and (iii) contains a qualified income offset provision. Pursuant to the agreement, partnership taxable income and loss is allocated 10 percent to John and 90 percent to Beth. In years 1 through 5, Jumping Beans generates annually $150,000 of rental income, incurs annual operating expenses of $90,000, annual interest expense of $60,000 and cost recovery deductions of $25,000 per year. A. What are John and Beth’s book capital accounts at the end of Year 5? B. What are John and Beth’s tax basis in their partnership interests at the end of Year 5? C. How would the answers to A. and B., above, change, if at all, if the $1,000,000 debt was nonrecourse?
John and Beth form a limited partnership, Jumping Beans, L.P. John, the general partner, contributes $10,000 and is obligated to restore any deficit in his capital account on liquidation. Beth, a limited partner, contributes land, adjusted basis of $20,000 and a fair market value of $90,000, and is not obligated to restore any deficit in her capital account on liquidation.
Jumping Beans borrows $1,000,000 on a recourse basis and constructs a rental building on the land for $1,000,000. Assume that the building has a 40 year recovery period and the note calls for payments of interest only for the first 10 years. The Jumping Beans partnership agreement (i) provides for the maintenance of capital accounts, (ii) provides that distributions in liquidation will be made in accordance with such capital accounts, and (iii) contains a qualified income offset provision. Pursuant to the agreement, partnership taxable income and loss is allocated 10 percent to John and 90 percent to Beth. In years 1 through 5, Jumping Beans generates annually $150,000 of rental income, incurs annual operating expenses of $90,000, annual interest expense of $60,000 and cost recovery deductions of $25,000 per year.
A. What are John and Beth’s book capital accounts at the end of Year 5?
B. What are John and Beth’s tax basis in their partnership interests at the end of Year 5?
C. How would the answers to A. and B., above, change, if at all, if the $1,000,000 debt was nonrecourse?
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