A and B form a partnership where A, the limited partner, contributes $500,000 and B, the general partner, contributes no cash. The partnership secures a $2 million (10 percent interest only) nonrecourse loan and acquires AB Apartments for $2.5 million. Assume that the results from the first year of operations of AB Apartments are as follows:

Net operating income ................................................ $ 250,000
Less debt service (interest only) ................................. -200,000
Before-tax cash flow .................................................... $ 50,000

Assume that tax depreciation the first year is $250,000.

The partnership agreement provides that 90 percent of all taxable income, loss, and cash flow from operations is to be allocated to A and 10 percent to B. At resale, taxable gains or losses are to be split 50–50 between A and B, and cash proceeds are distributed first to A in an amount equal to his original investment less any cash distributions previously received, and then split 50–50 between A and B.

a. What are the capital account balances for A and B after one year?

b. Assume that AB Apartments is sold after year 1 for $3 million with no expenses of sale. How much cash is available (before tax) from sale?

c. How much cash would be distributed to A and B upon sale of the property?

d. How much capital gain would be allocated to A and B upon sale of the property?

e. Calculate the capital account balances for A and B after sale.