--------------------------------------------------------------------------------

                          U. S. SECURITIES AND EXCHANGE
                        COMMISSION Washington, D.C. 20549


                               ------------------



                                   FORM 10-QSB


                               ------------------



             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended September 30, 2004


                               ------------------



                         Commission file number 0-23766


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
             Organized pursuant to the Laws of the State of Maryland


                               ------------------



        Internal Revenue Service - Employer Identification No. 52-1388957

                 11200 Rockville Pike, Rockville, Maryland 20852

                                 (301) 468-9200


                               ------------------





Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the  registrant  was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|





--------------------------------------------------------------------------------
<PAGE>



                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                              INDEX TO FORM 10-QSB

                    FOR THE QUARTER ENDED SEPTEMBER 30, 2004



                                                                          Page
                                                                          ----

Part I - FINANCIAL INFORMATION

Item 1.  Financial Statements

         Balance Sheets
           - September 30, 2004 and December 31, 2003....................  1

         Statements of Operations and Accumulated Losses
           - for the three and nine months ended September 30, 2004
             and 2003 ...................................................  2

         Statements of Cash Flows
           - for the nine months ended September 30, 2004 and 2003.......  3

         Notes to  Financial Statements
           - September 30, 2004 and 2003.................................  4

Item 2.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations..................................... 11

Item 3.  Controls and Procedures......................................... 13


Part II - OTHER INFORMATION

Item 3.  Defaults Upon Senior Securities................................. 14

Item 5.  Other Information............................................... 14

Item 6.  Exhibits and Reports on Form 8-K................................ 15

Signature................................................................ 16



<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                                 BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                      September 30,   December 31,
                                                                                          2004            2003
                                                                                      -------------   ------------
                                                                                       (Unaudited)
<S>                                                                                   <C>             <C>
Investments in and advances to partnerships held for sale .........................   $    608,405    $    776,410
Cash and cash equivalents .........................................................      4,664,009       3,470,418
Other assets ......................................................................            174              48
                                                                                      ------------    ------------

      Total assets ................................................................   $  5,272,588    $  4,246,876
                                                                                      ============    ============



                        LIABILITIES AND PARTNERS' CAPITAL


Due on investments in partnerships ................................................   $    404,600    $  1,047,600
Accrued interest payable ..........................................................      1,127,318       2,024,065
Accounts payable and accrued expenses .............................................         84,938         167,400
                                                                                      ------------    ------------

      Total liabilities ...........................................................      1,616,856       3,239,065
                                                                                      ------------    ------------

Commitments and contingencies

Partners' capital:

  Capital paid in:
    General Partners ..............................................................          2,000           2,000
    Limited Partners ..............................................................     21,202,500      21,202,500
                                                                                      ------------    ------------

                                                                                        21,204,500      21,204,500

  Less:
    Accumulated distributions to partners .........................................    (10,411,873)     (5,122,373)
    Offering costs ................................................................     (2,570,535)     (2,570,535)
    Accumulated losses ............................................................     (4,566,360)    (12,503,781)
                                                                                      ------------    ------------

      Total partners' capital .....................................................      3,655,732       1,007,811
                                                                                      ------------    ------------

      Total liabilities and partners' capital .....................................   $  5,272,588    $  4,246,876
                                                                                      ============    ============

</TABLE>

                   The accompanying notes are an integral part
                         of these financial statements.

                                       -1-

<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                            STATEMENTS OF OPERATIONS

                             AND ACCUMULATED LOSSES

                                   (Unaudited)

<TABLE>
<CAPTION>

                                                     For the three months ended       For the nine months ended
                                                           September 30,                     September 30,
                                                    -----------------------------   ----------------------------
                                                        2004            2003            2004            2003
                                                    ------------    -------------   ------------    ------------
<S>                                                 <C>             <C>             <C>             <C>
Share of income from partnerships ...............   $     11,052    $     66,043    $     52,612    $    134,346
                                                    ------------    ------------    ------------    ------------

Other revenue and expenses:

  Revenue:
    Interest and other ..........................         23,364          11,088          44,691          38,316
                                                    ------------    ------------    ------------    ------------

  Expenses:
    Interest ....................................         15,445          47,695         107,345         156,322
    General and administrative ..................         54,030          41,213         156,218         149,286
    Management fee ..............................         24,480          24,480          73,440          73,440
    Professional fees ...........................         18,875          58,219         114,887         180,476
    Amortization of deferred costs ..............             --           2,904              --           8,712
                                                    ------------    ------------    ------------    ------------

                                                         112,830         174,511         451,890         568,236
                                                    ------------    ------------    ------------    ------------

      Total other revenue and expenses ..........        (89,466)       (163,423)       (407,199)       (529,920)
                                                    ------------    ------------    ------------    ------------

Loss before gain on disposition of investment
  in partnerships ...............................        (78,414)        (97,380)       (354,587)       (395,574)

Gain on disposition of investment in partnerships      6,239,225              --       8,292,008              --
                                                    ------------    ------------    ------------    ------------

Net income (loss) ...............................      6,160,811         (97,380)      7,937,421        (395,574)

Accumulated losses, beginning of period .........    (10,727,171)    (12,112,126)    (12,503,781)    (11,813,932)
                                                    ------------    ------------    ------------    ------------

Accumulated losses, end of period ...............   $ (4,566,360)   $(12,209,506)   $ (4,566,360)   $(12,209,506)
                                                    ============    ============    ============    ============



Net income (loss) allocated to
  General Partners (1.51%) ......................   $     93,028    $     (1,470)   $    119,855    $     (5,973)
                                                    ============    ============    ============    ============

Net income (loss) allocated to
  Initial and Special Limited Partners (2.49%) ..   $    153,404    $     (2,425)   $    197,642    $     (9,850)
                                                    ============    ============    ============    ============


Net income (loss) allocated to
  BAC Holders (96%) .............................   $  5,914,379    $    (93,485)   $  7,619,924    $   (379,751)
                                                    ============    ============    ============    ============


Net income (loss) per BAC,
  based on 21,158 BACs outstanding ..............   $     279.53    $      (4.42)   $     360.14    $     (17.95)
                                                    ============    ============    ============    ============

</TABLE>

                   The accompanying notes are an integral part
                         of these financial statements.

                                       -2-

<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                  For the nine months ended
                                                                                         September 30,
                                                                                 ---------------------------
                                                                                     2004           2003
                                                                                 -----------    ------------
<S>                                                                              <C>            <C>
Cash flows from operating activities:
  Net income (loss) ..........................................................   $ 7,937,421    $  (395,574)

  Adjustments to reconcile net income (loss) to net cash used in operating
    activities:
    Share of income from partnerships ........................................       (52,612)      (134,346)
    Amortization of deferred costs ...........................................            --          8,712
    Gain on disposition of investment in partnerships ........................    (8,292,008)            --


    Changes in assets and liabilities:
      Increase in accrued interest receivable on advances to partnerships ....       (10,100)       (17,719)
      (Increase) decrease in other assets ....................................          (126)            86
      Increase in accrued interest payable ...................................       107,345        156,322
      (Decrease) increase in accounts payable and accrued expenses ...........       (82,462)        94,611
                                                                                 -----------    -----------

        Net cash used in operating activities ................................      (392,542)      (287,908)
                                                                                 -----------    -----------

Cash flows from investing activities:
  Proceeds from disposition of investment in partnerships,
    net of disposition fees of $1,213,362 paid to related party ..............     6,742,045             --
  Loans to local managing general partner ....................................      (495,749)            --
  Collection of loans to local managing general partner ......................       495,749             --
  Receipt of distributions from partnerships .................................       133,588        223,911
  Advance to Local Partnership ...............................................            --       (100,000)
                                                                                 -----------    -----------

        Net cash provided by investing activities ............................     6,875,633        123,911
                                                                                 -----------    -----------

Cash flows from financing activities:
  Distribution to BAC Holders ................................................    (5,289,500)            --
                                                                                 -----------    -----------

Net increase (decrease) in cash and cash equivalents .........................     1,193,591       (163,997)

Cash and cash equivalents, beginning of period ...............................     3,470,418      3,913,467
                                                                                 -----------    -----------

Cash and cash equivalents, end of period .....................................   $ 4,664,009    $ 3,749,470
                                                                                 ===========    ===========


Supplemental disclosure of cash flow information: Non-cash financing activity:
   Purchase money note principal and accrued interest
    payable assumed by purchaser of
    related investment in partnership ........................................   $ 1,647,092    $        --
                                                                                 ===========    -----------

</TABLE>


                   The accompanying notes are an integral part
                         of these financial statements.
                                       -3-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                           September 30, 2004 and 2003

                                   (Unaudited)


1.   BASIS OF PRESENTATION

     In the opinion of C.R.I.,  Inc. (CRI), the Managing  General  Partner,  the
accompanying unaudited financial statements reflect all adjustments,  consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position of Capital Realty Investors-85 Limited Partnership (the Partnership) as
of September 30, 2004,  and the results of its operations for the three and nine
month periods ended September 30, 2004 and 2003, and its cash flows for the nine
month periods ended  September 30, 2004 and 2003.  The results of operations for
the interim periods ended September 30, 2004, are not necessarily  indicative of
the results to be expected for the full year.

     The  accompanying  unaudited  financial  statements  have been  prepared in
conformity with accounting principles generally accepted in the United States of
America  and with the  instructions  to Form  10-QSB.  Certain  information  and
accounting  policies and  footnote  disclosures  normally  included in financial
statements prepared in conformity with accounting  principles generally accepted
in the United States of America have been condensed or omitted  pursuant to such
instructions. These condensed financial statements should be read in conjunction
with the financial  statements and notes thereto  included in the  Partnership's
annual report on Form 10-KSB at December 31, 2003.

     In December  2003,  the Financial  Accounting  Standards  Board issued FASB
Interpretation  No. 46  (revised  December  2003) (FIN 46-R),  Consolidation  of
Variable  Interest  Entities.  FIN 46-R clarifies the  application of Accounting
Research Bulletin 51, Consolidated  Financial  Statements,  for certain entities
that do not  have  sufficient  equity  at risk for the  entity  to  finance  its
activities without additional  subordinated financial support from other parties
or in which equity  investors do not have the  characteristics  of a controlling
financial interest  ("variable interest  entities").  Variable interest entities
within  the  scope of FIN 46-R  will be  required  to be  consolidated  by their
primary  beneficiary.  The primary  beneficiary of a variable interest entity is
determined  to be the party that  absorbs a majority  of the  entity's  expected
losses,  receives a majority of its  expected  returns,  or both.  The  Managing
General Partner has evaluated the Partnership's  investments in partnerships and
has  determined  that  they  are  not  variable  interest  entities  subject  to
consolidation by the Partnership under the provisions of FIN 46-R.


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS

a.   Due on investments in partnerships and accrued interest payable
     ---------------------------------------------------------------

                              Purchase money notes
                              --------------------

     The  Partnership's  remaining  obligation with respect to its investment in
Paradise Associates Limited Partnership (Paradise  Foothills),  in the form of a
nonrecourse  purchase  money note  having a principal  balance of $230,000  plus
accrued interest of $1,051,918 as of September 30, 2004, is payable in full upon
the  earliest  of: (i) sale or  refinancing  of the Local  Partnership's  rental
property;  (ii) payment in full of the Local  Partnership's  permanent  loan; or
(iii) maturity. The purchase money note matures in 2008.


                                       -4-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                           September 30, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

     The  purchase  money note,  which is  nonrecourse  to the  Partnership,  is
secured  by the  Partnership's  interest  in  Paradise  Foothills.  There  is no
assurance that the underlying  property will have  sufficient  appreciation  and
equity to enable the Partnership to pay the purchase money note's  principal and
accrued  interest when due. If the purchase money note is not paid in accordance
with its terms,  the  Partnership  will either have to renegotiate  the terms of
repayment or risk losing its partnership interest in Paradise Foothills.  In the
event that the purchase money note remains unpaid upon maturity,  the noteholder
may have the  right to  foreclose  on the  Partnership's  interest  in  Paradise
Foothills.

     Interest  expense on the  Partnership's  purchase money notes for the three
and nine month  periods  ended  September  30, 2004,  was $15,445 and  $107,345,
respectively,  and $47,695  and  $156,322  for the three and nine month  periods
ended  September 30, 2003,  respectively.  The accrued  interest  payable on the
purchase  money notes of $1,051,918  and $1,948,665 as of September 30, 2004 and
December 31, 2003, respectively,  is due on the respective maturity dates of the
purchase money notes or earlier,  in some instances,  if (and to the extent of a
portion thereof) the related Local  Partnership has distributable net cash flow,
as defined in the relevant Local Partnership agreement.

                               Paradise Foothills
                               ------------------

     The  Partnership  defaulted on its purchase money note relating to Paradise
Foothills when the note matured on January 30, 1996, and was not paid. Effective
March  31,  2003,  the  Managing  General  Partner  successfully  negotiated  an
agreement  to extend the maturity  date of the purchase  money note to March 31,
2008,  and to reduce the interest rate. The  Partnership  has begun  discussions
with the  local  managing  general  partner  to sell its  interest  in  Paradise
Foothills to the local managing  general  partner.  There is no assurance that a
sale of the Partnership's interest in Paradise Foothills will occur.

     Due  to the  possible  sale  of  the  Partnership's  interest  in  Paradise
Foothills, the Partnership's basis in the Local Partnership,  along with the net
unamortized  amount of  acquisition  fees and  property  purchase  costs,  which
totaled  $0 at  both  September  30,  2004  and  December  31,  2003,  has  been
reclassified to investments in and advances to partnerships held for sale in the
accompanying balance sheets.

     The principal  amount due to a local general partner of Paradise  Foothills
of $174,600,  plus accrued  interest of $75,400 at September  30, 2004,  will be
paid  upon  the  occurrence  of  specified  events,  as  outlined  in the  Local
Partnership's partnership agreement.

                                   The Pointe
                                   ----------

     The  Partnership  defaulted  on its  purchase  money note  relating to Mesa
Residential  Partners  Limited  Partnership   (formerly  Mesa  Partners  Limited
Partnership)  (The Pointe) when the note matured on June 30, 2003,  as extended,
and was not paid. The default amount included  principal and accrued interest of
$643,000 and $877,602,  respectively. The maturity date of the note was extended
to September 30, 2004. On June 4, 2004, the Partnership's interest in The Pointe
was  sold to an  affiliate  of the  local  managing  general  partner.  Net cash
proceeds  received by the  Partnership in June 2004 totaled  $460,153.  The sale
resulted in gain on disposition of investment in  partnerships of $2,052,784 for
financial  statement purposes and in total gain of $7,075,301 for federal income
tax purposes in 2004. In accordance with the terms of the Partnership Agreement,
in June 2004 the Managing General Partner was paid a disposition fee of $507,112
related to the sale.  The fee was netted against the related gain on disposition
of investment in partnerships.

                                       -5-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                           September 30, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

     Due to the impending sale of the Partnership's  interest in The Pointe, the
Partnership's  basis in the Local  Partnership,  along with the net  unamortized
amount of acquisition fees and property purchase costs, which totaled $54,461 at
December  31,  2003,  was   reclassified  to  investments  in  and  advances  to
partnerships held for sale in the accompanying balance sheet at that date.

b.   Advances to Local Partnerships
     ------------------------------

                               Paradise Foothills
                               ------------------

     In  connection  with the  refinancing  of the mortgage  loan secured by the
property  owned by Paradise  Foothills in March 2003, the  Partnership  advanced
$100,000  to the Local  Partnership  for  closing  costs and to  facilitate  the
repayment  of the  existing  mortgage  loan.  The  partners  modified  the Local
Partnership  agreement to give the new loan  priority in repayment  from sale or
refinancing  proceeds over all other  partner  loans.  For  financial  reporting
purposes,  this loan has been reduced to zero by the  Partnership as a result of
losses at the related Local Partnership level.

                                   The Pointe
                                   ----------

     Mesa  Residential  Partners  Limited  Partnership  (formerly  Mesa Partners
Limited  Partnership)  (The Pointe),  which owns apartments  located in El Paso,
Texas,  modified its mortgage loan in 1987. In connection with the mortgage loan
modification,  the  Partnership  advanced  a  total  of  $262,500  to the  Local
Partnership in 1987.  Repayment of these loans,  with simple  interest at 9% per
annum, was expected to occur upon sale or refinancing of the property.  However,
in July 2003,  when the first  mortgage  was  refinanced,  there were not enough
proceeds to repay the loans.  Therefore,  the Partnership contracted to sell its
loans  receivable  together  with its  interest in the Local  Partnership  to an
affiliate  of the local  general  partner.  As of  December  31,  2003,  accrued
interest was $387,563.  For financial reporting  purposes,  these loans had been
reduced to zero by the  Partnership  as a result of losses at the related  Local
Partnership level. On June 4, 2004, the Partnership's interest in The Pointe was
sold. See Note 2.a. hereof for additional information concerning the sale.

c.   Other Partnership matters
     -------------------------

                                 Willow Creek II
                                 ---------------

     The  Partnership  has begun  discussions  with the local  managing  general
partner to sell its  interest  in Willow  Creek II Limited  Partnership  (Willow
Creek II) to the local managing  general  partner.  There is no assurance that a
sale of the Partnership's interest in Willow Creek II will occur.

     Due to the possible sale of the Partnership's  interest in Willow Creek II,
the Partnership's basis in the Local Partnership, along with the net unamortized
amount of acquisition fees and property  purchase costs,  which totaled $608,405
and $679,282 at September 30, 2004 and December 31, 2003, respectively, has been
reclassified to investments in and advances to partnerships held for sale in the
accompanying balance sheets.

                                       -6-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                           September 30, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

d.   Property matters
     ----------------

                                 Semper Village
                                 --------------

     On December 19, 2003, the Local Partnership entered into a contract to sell
the property owned by Sheridan West Limited  Partnership  (Semper  Village).  On
July 1,  2004,  the  property  related  to Semper  Village  was  sold.  Net cash
proceeds,  including  a  $20,000  Local  Partnership  reserve,  received  by the
Partnership  in July 2004,  totaled  $6,301,892.  The sale  resulted  in gain on
disposition of investment in partnerships of $6,239,225 for financial  statement
purposes and in total gain of  approximately  $10,267,000 for federal income tax
purposes in 2004. In accordance with the terms of the Partnership Agreement,  in
July 2004 the Managing  General  Partner was paid a disposition  fee of $706,250
related to the sale.  The fee was netted against the related gain on disposition
of investment in partnerships.

     Due to the  impending  sale of the  property  related to the  Partnership's
interest in Semper Village,  the Partnership's  basis in the Local  Partnership,
along with net  unamortized  amount of  acquisition  fees and property  purchase
costs,  which  totaled  $42,667  at  December  31,  2003,  was  reclassified  to
investments in and advances to  partnerships  held for sale in the  accompanying
balance sheet at that date.

e.   Summarized financial information
     --------------------------------

     Combined  statements of operations for the two and four Local  Partnerships
in which  the  Partnership  was  invested  as of  September  30,  2004 and 2003,
respectively,  follow.  The combined  statements of operations for the three and
nine month periods ended September 30, 2004, include  information for The Pointe
through the date of sale of the  Partnership's  interest  in June 2004,  and for
Semper  Village  through  the date of sale of the  property  related  to  Semper
Village  in  July  2004.  The  combined   statements  have  been  compiled  from
information  supplied  by the  management  agents  of  the  properties  and  are
unaudited.  The information for each of the periods is presented  separately for
those Local  Partnerships  which have investment basis (equity method),  and for
those Local Partnerships which have cumulative losses in excess of the amount of
the  Partnership's   investment  in  those  Local  Partnerships  (equity  method
suspended). Appended after the combined statements is information concerning the
Partnership's  share of income from partnerships  related to cash  distributions
recorded as income, and related to the Partnership's  share of income from Local
Partnerships.

                                       -7-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                           September 30, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued


                                         COMBINED STATEMENTS OF OPERATIONS
                                                    (Unaudited)
<TABLE>
<CAPTION>
                                                                     For the three months ended
                                                                           September 30,
                                                  -----------------------------------------------------------
                                                             2004                              2003
                                                  -----------------------------------------------------------
                                                    Equity                            Equity
                                                    Method         Suspended          Method        Suspended
                                                  ----------       ----------       ----------      ----------
         <S>                                      <C>              <C>              <C>             <C>
         Number of Local Partnerships                 1                1                2               2
                                                      =                =                =               =

         Revenue:
           Rental                                 $  268,439       $  272,691       $  735,676      $  754,336
           Other                                      11,756           24,684           64,254          34,971
                                                  ----------       ----------       ----------      ----------

             Total revenue                           280,195          297,375          799,930         789,307
                                                  ----------       ----------       ----------      ----------

         Expenses:
           Operating                                 168,939          156,481          424,837         388,687
           Interest                                   45,395          121,077          168,129         327,905
           Depreciation and amortization              54,696           92,518          134,285         152,979
                                                  ----------       ----------       ----------      ----------

             Total expenses                          269,030          370,076          727,251         869,571
                                                  ----------       ----------       ----------      ----------

         Net income (loss)                        $   11,165       $  (72,701)      $   72,679      $  (80,264)
                                                  ==========       ==========       ==========      ==========

         Cash Distributions                       $       --       $       --       $   89,099      $       --
                                                  ==========       ==========       ==========      ==========

         Cash distributions recorded as
           reduction of investment in
           partnerships                           $       --       $       --       $   89,099      $       --
                                                  ==========       ==========       ==========      ==========

         Partnership's share of Local
           Partnership net income                 $   11,052       $       --       $   71,949      $       --

         Miscellaneous                                    --               --               --          (5,906)
                                                  ---------------------------       --------------------------


         Share of income from partnerships                  $11,052                           $66,043
                                                            =======                           =======
</TABLE>


                                       -8-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                           September 30, 2004 and 2003

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

<TABLE>
<CAPTION>
                                                                    For the nine months ended
                                                                           September 30,
                                                  -----------------------------------------------------------
                                                               2004                            2003
                                                  -----------------------------------------------------------
                                                    Equity                            Equity
                                                    Method         Suspended          Method        Suspended
                                                  ----------       ----------       ----------      ----------
         <S>                                      <C>              <C>              <C>             <C>
         Number of Local Partnerships                  1               1                 2              2
                                                       =               =                 =              =

         Revenue:
           Rental                                 $  826,613       $2,452,471       $2,228,928      $2,263,010
           Other                                      29,540          200,313          179,004         104,920
                                                  ----------       ----------       ----------      ----------

             Total revenue                           856,153        2,652,784        2,407,932       2,367,930
                                                  ----------       ----------       ----------      ----------

         Expenses:
           Operating                                 492,526        1,497,539        1,246,068       1,166,060
           Interest                                  136,187          796,579          504,390         983,713
           Depreciation and amortization             164,088          617,981          402,855         458,939
                                                  ----------       ----------       ----------      ----------

             Total expenses                          792,801        2,912,099        2,153,313       2,608,712
                                                  ----------       ----------       ----------      ----------

         Net income (loss)                        $   63,352       $ (259,315)      $  254,619      $ (240,782)
                                                  ==========       ==========       ==========      ==========

         Cash distributions                       $  133,588       $       --       $  223,911      $       --
                                                  ==========       ==========       ==========      ==========

         Cash distributions recorded as
           reduction of investment in
           partnerships                           $  133,588       $       --       $  223,911      $       --
                                                  ==========       ==========       ==========      ==========

         Partnership's share of Local
           Partnership net income                 $   62,712       $       --       $  252,065      $       --

         Advance to Local Partnership                     --               --         (100,000)             --

         Miscellaneous                                    --          (10,100)              --         (17,719)
                                                  ---------------------------       --------------------------


         Share of income from partnerships                  $52,612                           $134,346
                                                            =======                           ========

</TABLE>

     Cash  distributions  received from Local Partnerships which have investment
basis (equity method) are recorded as a reduction of investments in partnerships
and as cash  receipts  on the  respective  balance  sheets.  Cash  distributions
received from Local  Partnerships  which have cumulative losses in excess of the
amount of the  Partnership's  investments  in those Local  Partnerships  (equity
method  suspended)  are  recorded  as share of income from  partnerships  on the
respective  statements  of  operations  and as cash  receipts on the  respective
balance sheets.  As of September 30, 2004 and 2003, the  Partnership's  share of
cumulative  losses  to date for one of two and two of four  Local  Partnerships,
respectively,  exceeded  the  amount  of the  Partnership's  investments  in and
advances to those Local Partnerships by $6,019,683 and $7,208,627, respectively.
As the  Partnership  has no  further  obligation  to  advance  funds or  provide
financing to these Local Partnerships, the excess losses have not been reflected
in the accompanying financial statements.


3. RELATED PARTY TRANSACTIONS

     In accordance with the terms of the Partnership Agreement,  the Partnership
is obligated to reimburse the Managing  General  Partner for its direct expenses
in connection with managing the  Partnership.  The Partnership  paid $46,947 and
$128,147  for the  three  and nine  month  periods  ended  September  30,  2004,
respectively,  and $31,341  and  $123,498  for the three and nine month  periods
ended  September  30, 2003,  respectively,  to the Managing  General  Partner as
direct  reimbursement of expenses  incurred on behalf of the  Partnership.  Such
expenses are included in general and administrative expenses in the accompanying
statements of operations.


                                       -9-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                           September 30, 2004 and 2003

                                   (Unaudited)


3.   RELATED PARTY TRANSACTIONS - Continued


     In accordance with the terms of the Partnership Agreement,  the Partnership
is obligated to pay the Managing General Partner an annual incentive  management
fee  (Management  Fee) after all other expenses of the Partnership are paid. The
Partnership  paid the Managing  General  Partner a Management Fee of $24,480 for
each of the three month periods ended  September 30, 2004 and 2003,  and $73,440
for each of the nine month periods ended September 30, 2004 and 2003.

     In  accordance  with the  terms of a  Definitive  Proxy  Statement  for the
Liquidation  and Dissolution of the Partnership  (Definitive  Proxy  Statement),
which has been approved by a majority of the units of Limited Partner  Interest,
the Managing  General Partner may receive an incentive  disposition fee of up to
five percent of the sales prices of the  properties  if it markets and sells the
properties in which the Partnership  holds  interests  instead of having a third
party do so. In June 2004, the Managing  General  Partner was paid a disposition
fee of $507,112 related to the sale of the Partnership's  interest in The Pointe
on June 4, 2004.  The fee was netted  against the related gain on disposition of
investment in partnerships.  In July 2004, the Managing General Partner was paid
a  disposition  fee of  $706,250  related to the sale of the  property  owned by
Semper  Village on July 1, 2004.  The fee was netted against the related gain on
disposition of investment in partnerships.

     CRI,  William B. Dockser and H. William  Willoughby are General Partners of
the  Partnership.  In  connection  with a proxy seeking the  liquidation  of the
Partnership, in January 2003, one Limited Partner filed a purported class action
and derivative  lawsuit against these three General  Partners  alleging  certain
deficiencies in the Definitive  Proxy Statement.  After various  motions,  cross
motions,  and appeals,  on February 19, 2004,  the U.S. Court of Appeals for the
Fourth Circuit  granted the  Partnership's  motion to dismiss,  and the case has
been  closed.  The  Partnership's   Partnership  Agreement  contains  provisions
pursuant to which the General Partners may seek indemnification for their costs,
including the  requirement  that they obtain an opinion of  independent  counsel
that  the  matter  is  subject  to  indemnification.  The  required  opinion  of
independent  counsel was received  during the second  quarter of 2004,  at which
time a total of $138,933 was reimbursed to the General Partners.

     In connection with the local managing general partner's discounted purchase
of two bank  loans owed by the Local  Partnership  which  owns The  Pointe,  the
Partnership  advanced  $218,000 in February 2004, and $277,749 in March 2004, to
the local managing general partner.  These advances were repaid,  with interest,
at the time of the sale of the  Partnership's  interest  in The  Pointe  in June
2004.


4.   DISTRIBUTION TO BAC HOLDERS

     On August 31, 2004, the Partnership made a cash  distribution of $5,289,500
($250  per BAC  unit) to BAC  holders  of  record  as of  August  1,  2004.  The
distribution  consisted of proceeds  received from the sale of the Partnership's
interest in the Pointe in June 2004,  and from the sale of the property owned by
Semper Village in July 2004.

                                      # # #

                                      -10-

<PAGE>
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
          of Financial Condition and Results of Operations


     Capital  Realty  Investors-85   Limited   Partnership's  (the  Partnership)
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  section  is  based  on  the  financial   statements,   and  contains
information  that  may  be  considered  forward  looking,  including  statements
regarding  the effect of  governmental  regulations.  Actual  results may differ
materially from those  described in the forward  looking  statements and will be
affected  by  a  variety  of  factors  including  national  and  local  economic
conditions,  the  general  level of  interest  rates,  governmental  regulations
affecting  the  Partnership  and  interpretations  of  those  regulations,   the
competitive  environment in which the Partnership operates, and the availability
of working capital.

                          Critical Accounting Policies
                          ----------------------------

     The  Partnership has disclosed its selection and application of significant
accounting  policies in Note 1 of the notes to financial  statements included in
the  Partnership's  annual  report on Form  10-KSB at  December  31,  2003.  The
Partnership accounts for its investments in partnerships (Local Partnerships) by
the equity  method  because the  Partnership  is a limited  partner in the Local
Partnerships.  As such the  Partnership  has no control over the  selection  and
application  of  accounting  policies,  or the use of  estimates,  by the  Local
Partnerships.  Environmental  and operational  trends,  events and uncertainties
that  might  affect the  properties  owned by the Local  Partnerships  would not
necessarily have a significant  impact on the  Partnership's  application of the
equity method of accounting,  since the equity method has been suspended for one
Local  Partnership  which has  cumulative  losses in excess of the amount of the
Partnership's investment in that Local Partnership.

                          New Accounting Pronouncement
                          ----------------------------

     In December  2003,  the Financial  Accounting  Standards  Board issued FASB
Interpretation  No. 46  (revised  December  2003) (FIN 46-R),  Consolidation  of
Variable  Interest  Entities.  FIN 46-R clarifies the  application of Accounting
Research Bulletin 51, Consolidated  Financial  Statements,  for certain entities
that do not  have  sufficient  equity  at risk for the  entity  to  finance  its
activities without additional  subordinated financial support from other parties
or in which equity  investors do not have the  characteristics  of a controlling
financial interest  ("variable interest  entities").  Variable interest entities
within  the  scope of FIN 46-R  will be  required  to be  consolidated  by their
primary  beneficiary.  The primary  beneficiary of a variable interest entity is
determined  to be the party that  absorbs a majority  of the  entity's  expected
losses,  receives a majority of its  expected  returns,  or both.  The  Managing
General Partner has evaluated the Partnership's  investments in partnerships and
has  determined  that  they  are  not  variable  interest  entities  subject  to
consolidation by the Partnership under the provisions of FIN 46-R.

                          Financial Condition/Liquidity
                          -----------------------------

     The Partnership's liquidity, with unrestricted cash resources of $4,664,009
as of September 30, 2004, along with anticipated  future cash distributions from
Local  Partnerships,  is  expected  to be  adequate  to  meet  its  current  and
anticipated operating cash needs. As of October 28, 2004, there were no material
commitments for capital expenditures.

                                      -11-

<PAGE>
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
          of Financial Condition and Results of Operations - Continued


     The  Partnership's  remaining  obligation with respect to its investment in
Paradise Associates Limited Partnership (Paradise  Foothills),  in the form of a
nonrecourse  purchase  money note  having a principal  balance of $230,000  plus
accrued interest of $1,051,918 as of September 30, 2004, is payable in full upon
the  earliest  of: (i) sale or  refinancing  of the Local  Partnership's  rental
property;  (ii) payment in full of the Local  Partnership's  permanent  loan; or
(iii)  maturity.  The  purchase  money note  matures  in 2008.  See the notes to
financial statements for additional  information  concerning this purchase money
note.

     The  purchase  money note,  which is  nonrecourse  to the  Partnership,  is
secured  by the  Partnership's  interest  in  Paradise  Foothills.  There  is no
assurance that the underlying  property will have  sufficient  appreciation  and
equity to enable the Partnership to pay the purchase money note's  principal and
accrued  interest when due. If the purchase money note is not paid in accordance
with its terms,  the  Partnership  will either have to renegotiate  the terms of
repayment or risk losing its partnership interest in Paradise Foothills.  In the
event that the purchase money note remains unpaid upon maturity,  the noteholder
may have the  right to  foreclose  on the  Partnership's  interest  in  Paradise
Foothills.

     Included in due on investments in  partnerships  is $174,600 due to a local
general  partner  related to Paradise  Foothills at both  September 30, 2004 and
December  31,  2003;  accrued  interest  payable  thereon  was  $75,400  at both
September  30, 2004 and December 31, 2003.  These  amounts will be paid upon the
occurrence of certain specified  events, as outlined in the Local  Partnership's
partnership agreement.

     The Managing  General  Partner has received  consent from a majority of BAC
Holders for the  liquidation  of the  Partnership.  It is  anticipated  that the
Partnership's  remaining  obligation,  discussed  above,  would  be  retired  in
conjunction with such Liquidation. Implementation of the liquidation was delayed
by a  lawsuit,  which has been  dismissed.  There can be no  assurance  that the
Liquidation  will  be  completed   pursuant  to  the  Plan  of  Liquidation  and
Dissolution.

     The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient  cash is available for operating  requirements.
For the nine month  period  ended  September  30,  2004,  net cash  provided  by
investing  activities was adequate to support operating cash requirements.  Cash
and cash  equivalents  increased  $1,193,591  during the nine month period ended
September 30, 2004,  primarily due to sales  proceeds  received from the sale of
the  Partnership's  interest in The Pointe,  the sale of the property related to
Semper Village,  and the receipt of a distribution  from one Local  Partnership,
partially offset by a distribution to BAC holders and net cash used in operating
activities.

     On August 31, 2004, the Partnership made a cash  distribution of $5,289,500
($250  per BAC  unit) to BAC  holders  of  record  as of  August  1,  2004.  The
distribution  consisted of proceeds  received from the sale of the Partnership's
interest in The Pointe in June 2004,  and from the sale of the property owned by
Semper Village in July 2004.

     The  Managing  General  Partner  currently  intends  to  retain  all of the
Partnership's  remaining  undistributed  cash  for the  possible  prepayment  or
payment of the  Partnership's  outstanding  purchase money note, for its Plan of
Liquidation, and for operating cash reserves.

                              Results of Operations
                              ---------------------

     The  Partnership  recognized  net income of $6,160,811  for the three month
period  ended  September  30,  2004,  compared  to net loss of  $97,380  for the
corresponding period in 2003, primarily due to gain on disposition of investment
in  partnership  related to the sale of the property  owned by Semper Village in
July 2004,  a decrease in  professional  legal fees due to the  dismissal of the
lawsuit related to the Partnership's proxy for liquidation of the Partnership, a
decrease in interest  expense related to lower purchase money note balances,  an
increase in interest  and other  revenue due to higher cash and cash  equivalent
balances,  and a nominal  decrease in amortization of deferred costs.  Partially
offsetting  the net income were a decrease in share of income from  partnerships
due to the cessation of share of income from Semper  Village which was accounted
for under the  equity  method in 2003,  but for  which  the  equity  method  was
suspended in 2004 as result of the Partnership's  investment basis being reduced
to zero by operating  losses at the property,  and a nominal increase in general
and administrative expenses.

                                      -12-

<PAGE>
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
          of Financial Condition and Results of Operations - Continued


     The  Partnership  recognized  net income of  $7,937,421  for the nine month
period  ended  September  30,  2004,  compared to net loss of  $395,574  for the
corresponding period in 2003, primarily due to gain on disposition of investment
in partnerships related to the sale of the Partnership's  interest in The Pointe
in June 2004 and to the sale of the  property  owned by Semper  Village  in July
2004, and also due to decreases in professional legal fees and interest expense,
and an increase in  interest  revenue,  all as  discussed  above,  and a nominal
decrease in amortization of deferred costs.  Partially offsetting the net income
were a decrease in share of income from partnerships,  as discussed above, and a
nominal increase in general and administrative expenses.

     For financial reporting purposes, the Partnership,  as a limited partner in
the Local  Partnerships,  does not record losses from the Local  Partnerships in
excess of its  investment  to the  extent  that the  Partnership  has no further
obligation to advance funds or provide financing to the Local Partnerships. As a
result,  the  Partnership's  share of income from partnerships for the three and
nine month periods ended  September 30, 2004,  did not include losses of $14,969
and $215,899  respectively,  compared to excluded losses of $79,455 and $138,351
for the three and nine month periods ended September 30, 2003, respectively.

     No other  significant  changes in the  Partnership's  operations have taken
place during the nine month period ended September 30, 2004.


Item 3. Controls and Procedures

     In October 2004,  representatives  of the Managing  General  Partner of the
Partnership  carried out an  evaluation of the  effectiveness  of the design and
operation of the Partnership's  disclosure controls and procedures,  pursuant to
Exchange Act Rules  13a-15 and 15d-15.  The  Managing  General  Partner does not
expect that the  Partnership's  disclosure  controls and procedures will prevent
all error and all fraud.  A control  system,  no matter how well  conceived  and
operated,  can provide only  reasonable  assurance  that the  objectives  of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource  constraints,  and the benefits of controls must be
considered relative to their costs.  Because of the inherent  limitations in all
control systems,  no evaluation of controls can provide absolute  assurance that
all control issues have been detected.  These inherent  limitations  include the
realities that judgments in  decision-making  can be faulty, and that breakdowns
can occur  because  of simple  error or  mistake.  The  design of any  system of
controls also is based in part upon certain  assumptions about the likelihood of
future  events,  and there can be no  assurance  that any design will succeed in
achieving its stated goals under all  potential  future  conditions.  Over time,
controls may become inadequate  because of changes in conditions,  or the degree
of compliance  with the policies or procedures may  deteriorate.  Because of the
inherent  limitations in a cost-effective  control system,  misstatements due to
error or  fraud  may  occur  and not be  detected.  Based  on the  October  2004
evaluation,  and subject to the foregoing,  the Principal  Executive Officer and
Principal Financial Officer concluded that the Partnership's disclosure controls
and  procedures are effective as of the end of the period covered by this report
to alert them in a timely  manner to any  material  information  relating to the
Partnership that must be included in the Partnership's periodic SEC filings, and
particularly  during  the  period in which  this  report is being  prepared.  In
addition,  there have been no significant changes in the Partnership's  internal
control over financial  reporting that occurred  during the  Partnership's  most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Partnership's internal control over financial reporting.

                                      -13-

<PAGE>
Part II. OTHER INFORMATION
Item 3. Defaults upon Senior Securities

     See Note 2.a. of the notes to  financial  statements  contained  in Part I,
Item 1, hereof,  for  information  concerning the  Partnership's  default on one
purchase money note.


Item 5. Other Information

     There is no  established  market for the  purchase  and sale of  Beneficial
Assignee  Certificates  (BACs),   although  various  informal  secondary  market
services exist. Due to the limited markets, however,  investors may be unable to
sell or otherwise dispose of their BACs.

                           Unregistered Tender Offers
                           --------------------------

     On September 15, 2003, Equity Resource  Arlington Fund Limited  Partnership
(Arlington)  initiated an unregistered tender offer to purchase up to 215 of the
outstanding BAC units at a price of $350 per unit; the offer expired October 15,
2003. On January 10, 2003,  Arlington  initiated an unregistered tender offer to
purchase up to 369 of the outstanding BAC units at a price of $350 per unit; the
offer expired February 10, 2003.  Arlington is unaffiliated with the Partnership
or the Managing  General Partner.  The prices offered were determined  solely at
the  discretion  of Arlington and do not  necessarily  represent the fair market
value of each BAC.

     On  January  21,  2003,   Peachtree  Partners   (Peachtree)   initiated  an
unregistered  tender offer to purchase an  unspecified  number of BAC units at a
price of $375  per  unit;  the  offer  expired  March  12,  2003.  Peachtree  is
unaffiliated  with the Partnership or the Managing  General  Partner.  The price
offered  was  determined  solely at the  discretion  of  Peachtree  and does not
necessarily represent the fair market value of each BAC.

     The  Managing  General  Partner did not  express  any opinion and  remained
neutral  toward  the  unregistered  tender  offers  for the  purchase  of  Units
described above.

                                      -14-

<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K


     a.   Exhibits

          Exhibit No.    Description
          -----------    -----------

             31.1        Certification of Principal Executive Officer, pursuant
                         to 18 U.S.C. Section 1350, as adopted pursuant to
                         Section 302 of the Sarbanes-Oxley Act of 2002.

             31.2        Certification of Principal Financial Officer, pursuant
                         to 18 U.S.C. Section 1350, as adopted pursuant to
                         Section 302 of the Sarbanes-Oxley Act of 2002.

             32          Certification of Principal Executive
                         Officer and Principal Financial Officer,
                         pursuant to 18 U.S.C. Section 1350, as
                         adopted pursuant to Section 906 of the
                         Sarbanes-Oxley Act of 2002.

     b.   No reports of on Form 8-K were  filed with the  Commission  during the
          quarter ended September 30, 2004.

All other Items are not applicable.

                                      -15-

<PAGE>
                                    SIGNATURE


     In accordance  with the  requirements  of the Exchange Act, the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.



                                  CAPITAL REALTY INVESTORS-85 LIMITED
                                    PARTNERSHIP
                                  ----------------------------------------------
                                  (Registrant)

                                  by:  C.R.I., Inc.
                                       -----------------------------------------
                                       Managing General Partner



November 4, 2004                       by:  /s/ Michael J. Tuszka
----------------                            ------------------------------------
DATE                                        Michael J. Tuszka
                                              Vice President
                                              and Chief Accounting Officer
                                              (Principal Financial Officer
                                              and Principal Accounting Officer)

                                      -16-

<PAGE>