Question

Mary and Carol each contribute $50,000 to their newly formed general partnership (each partner is required to restore any deficit in the partner’s capital account upon liquidation of the partnership). The partnership borrows $900,000 on a non-recourse basis and buys a $1,000,000 building. The building generates $100,000 of depreciation a year for ten years, and the partnership has no other items of income or loss. The partners agree to allocate all losses equally until their capital accounts are zero; after that the partnership specially allocates all losses to Mary. Assume that capital accounts are maintained in accordance with the rules in Regulations §1.704-1(b)(2)(iv) and that liquidating distributions are to be made in accordance with positive capital account balances. Do the allocations have economic effect in years 1, 2 and 3?

Answer 1

As agreed between the the partners that losses till capital is zero will be born by partners equally and after that mary will bear all the losses.So Depreciation will be distributed equally until partners capital is zero. So for the first year it will be distributed equally between the partners.Since in the second year capital would be zero so after that depreciation loss would be bear by Mary only. below is ledger of both: