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In some government assisted apartment projects, the distributions of profits (or cash flow) is limited by agreement between the government and borrower. These are called limited disbursement projects.

Each year that a taxpayer has incurred a loss from their partnership interests, their capital account was reduced by the amount of the loss. Once these losses have exceeded the partner’s initial capital, they start to build a negative capital account.
For example: If your initial capital account was $50,000 and you received a K-1 showing a loss of $56,000, then your capital account at the end of the year would be -$6,000. Each year you receive a K-1 showing a loss, the negative capital account will get larger. Most of these losses are created through depreciation deductions. The faster you are able to depreciate a property, the larger the negative capital account will grow.

Even if you do nothing, you will have made a decision that has tax consequences. For example; after the depreciation deductions have been exhausted, you will begin the slow process of recapturing these deductions through Phantom Income. You will pay tax on this income at ordinary income tax rates each year when you get your K-1s. If you take no action, the tax burden will continue to rise throughout the life of the mortgage.