A and B form a partnership where A, the limited partner, contributes $515,000 and B, the general partner, contributes no cash. The partnership secures a $2 million (10% 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	$ 256,000
Less debt service (interest only)	200,000
Before-tax cash flow	$ 56,000

Assume that tax depreciation the first year is $257,500.

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 5050 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 5050 between A and B.

Required:

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.