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


                          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 June 30, 2006


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



                         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 [ ]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X]


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


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                              INDEX TO FORM 10-QSB

                       FOR THE QUARTER ENDED JUNE 30, 2006



                                                                          Page


Part I - FINANCIAL INFORMATION

Item 1.  Financial Statements

         Balance Sheets
           - June 30, 2006 and December 31, 2005........................... 1

         Statements of Operations and Accumulated Gain (Loss)
           - for the three and six months ended June 30, 2006 and 2005 .... 2

         Statements of Cash Flows
           - for the six months ended June 30, 2006 and 2005............... 3

         Notes to  Financial Statements
           - June 30, 2006 and 2005........................................ 4

Item 2.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations....................................... 9

Item 3.  Controls and Procedures........................................... 10


Part II - OTHER INFORMATION

Item 5.  Other Information................................................. 11

Item 6.  Exhibits.......................................................... 11

Signature.................................................................. 12

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


                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                                 BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                        June 30,      December 31,
                                                                                          2006            2005
                                                                                      -------------   ------------
                                                                                       (Unaudited)
<S>                                                                                   <C>             <C>
Cash and cash equivalents .........................................................   $    122,989    $  5,169,823
Sales proceeds receivable .........................................................           --           409,839
Other assets ......................................................................             14             903
                                                                                      ------------    ------------
      Total assets ................................................................   $    123,003    $  5,580,565
                                                                                      ============    ============



                        LIABILITIES AND PARTNERS' CAPITAL


Accounts payable and accrued expenses .............................................   $     15,630    $    103,187
                                                                                      ------------    ------------
      Total liabilities ...........................................................         15,630         103,187
                                                                                      ------------    ------------

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 .........................................    (18,482,804)    (13,204,729)
    Offering costs ................................................................     (2,570,535)     (2,570,535)
    Accumulated (loss) gain .......................................................        (43,788)         48,142
                                                                                      ------------    ------------
      Total partners' capital .....................................................        107,373       5,477,378
                                                                                      ------------    ------------
      Total liabilities and partners' capital .....................................   $    123,003    $  5,580,565
                                                                                      ============    ============
</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 GAIN (LOSS)

                                   (Unaudited)
<TABLE>
<CAPTION>
                                                              For the three months ended            For the six months ended
                                                                       June 30,                             June 30,
                                                            -------------------------------      -------------------------------
                                                                2006              2005               2006               2005
                                                            ------------      -------------      ------------       ------------
<S>                                                         <C>               <C>                <C>                <C>
Share of (loss) income from partnership                     $         --      $     (1,451)      $         --       $     16,413
                                                            ------------      ------------       ------------       ------------

Other revenue and expenses:

  Revenue:
    Interest                                                       8,622            28,742             60,304             52,142
                                                            ------------      ------------       ------------       ------------
  Expenses:
    General and administrative                                    54,269            49,048            119,440             98,550
    Management fee                                                    --            24,480             16,320             48,960
    Professional fees                                              7,794            22,000             17,994             44,000
    Interest                                                          --            16,217                 --             32,434
                                                            ------------      ------------       ------------       ------------

                                                                  62,063           111,745            153,754            223,944
                                                            ------------      ------------       ------------       ------------

      Total other revenue and expenses                           (53,441)          (83,003)           (93,450)          (171,802)
                                                            ------------      ------------       ------------       ------------

Loss before gain on disposition of investment
  in partnership                                                 (53,441)          (84,454)           (93,450)          (155,389)

Gain on disposition of investment in partnership                     724             1,966              1,520              5,914
                                                            ------------      ------------       ------------       ------------

Net loss                                                         (52,717)          (82,488)           (91,930)          (149,475)

Accumulated gain (losses), beginning of period                     8,929        (4,641,569)            48,142         (4,574,582)
                                                            ------------      ------------       ------------       ------------

Accumulated loss, end of period                             $    (43,788)     $ (4,724,057)      $    (43,788)      $ (4,724,057)
                                                            ============      ============       ============       ============

Net loss allocated to
  General Partners (1.51%)                                  $       (796)     $     (1,246)      $     (1,388)      $     (2,257)
                                                            ============      ============       ============       ============

Net loss allocated to
  Initial and Special Limited Partners (2.49%)              $     (1,313)     $     (2,054)      $     (2,289)      $     (3,722)
                                                            ============      ============       ============       ============

Net loss allocated to
  BAC Holders (96%)                                         $    (50,608)     $    (79,188)      $    (88,253)      $   (143,496)
                                                            ============      ============       ============       ============

Net loss per BAC,
  based on 4,732 and 21,732, respectively,
  BACs outstanding                                          $      (10.69)    $      (3.74)      $      (18.65)     $      (6.78)
                                                            =============     ============       =============      ============
</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 six months ended
                                                                                          June 30,
                                                                                --------------------------
                                                                                    2006           2005
                                                                                -----------    -----------
<S>                                                                             <C>            <C>
Cash flows from operating activities:
  Net loss ..................................................................   $   (91,930)   $  (149,475)

  Adjustments to reconcile net loss to net cash used in operating activities:
    Share of income from partnerships .......................................          --          (16,413)
    Gain on disposition of investment in partnership ........................        (1,520)        (5,914)

    Changes in assets and liabilities:
      Increase in other assets ..............................................           889           (172)
      Increase in accrued interest payable ..................................          --           32,434
      Decrease in accounts payable and accrued expenses .....................       (87,557)       (10,048)
                                                                                -----------    -----------

        Net cash used in operating activities ...............................      (180,118)      (149,588)
                                                                                -----------    -----------

Cash flows from investing activities:
  Collection of sales proceeds receivable ...................................       409,839           --
  Proceeds from disposition of investment in partnership ....................         1,520           --
                                                                                -----------    -----------

        Net cash provided by investing activities ...........................       411,359          5,914
                                                                                -----------    -----------

Cash flows from financing activities:
  Distribution to BAC holders ...............................................    (5,278,075)          --
                                                                                -----------    -----------

Net decrease in cash and cash equivalents ...................................    (5,046,834)      (143,674)

Cash and cash equivalents, beginning of period ..............................     5,169,823      4,665,352
                                                                                -----------    -----------

Cash and cash equivalents, end of period ....................................   $   122,989    $ 4,521,678
                                                                                ===========    ===========

</TABLE>
                   The accompanying notes are an integral part
                         of these financial statements.

                                       -3-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2006 and 2005

                                   (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 June 30, 2006,  and the results of its operations for the three and six month
periods  ended  June 30,  2006 and  2005,  and its cash  flows for the six month
periods ended June 30, 2006 and 2005.  The results of operations for the interim
periods ended June 30, 2006, are not necessarily indicative of the results to be
expected for the full year.

     The  Partnership is currently in the process of dissolving its  operations.
The  Partnership is organized  under the laws of the State of Maryland.  Section
10-801(1)  of the  Maryland  Limited  Partnership  Act  provides  that a limited
partnership  is dissolved  and its affairs wound up upon the happening of events
specified in the Partnership  Agreement.  Pursuant to Section 8.01(a)(ii) of the
Partnership  Agreement,  the Partnership will dissolve 90 days after the sale or
other disposition of all Local Partnership Interests and substantially all other
tangible assets of the Partnership.

     The  Partnership  disposed  of its  last  remaining  investments  in  Local
Partnerships  in 2005.  The  Partnership  was  dissolved  under the terms of the
Partnership Agreement on March 20, 2006, but the winding up of the Partnership's
business may take several months more. In any event,  the  Partnership  will not
conduct  any active  business  operations  and will only take  actions  that are
required to further its own liquidation.

     The  Partnership's  final liquidation is anticipated to occur no later than
the end of its December 31, 2006 fiscal year and may occur as early as September
30, 2006. In April 2006, the Partnership  distributed all of the net liquidation
proceeds to its Limited Partners.  These liquidation  proceeds  represent all of
the proceeds which the Partnership expects to distribute to Limited Partners.

     The carrying value of the remaining assets and liabilities reflected in the
accompanying   June  30,  2006  and  December  31,  2005  financial   statements
approximates fair value.

     The  accompanying  unaudited  financial  statements  have been  prepared in
conformity with accounting principles generally accepted in the United States of
America (US GAAP) 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 US GAAP 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, 2005.


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS

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

     Interest  expense on the  Partnership's  purchase  money note for the three
month  periods ended June 30, 2006 and 2005,  was $0 and $16,217,  respectively.
Interest  expense  on the  Partnership's  purchase  money note for the six month
periods ended June 30, 2006 and 2005, was $0 and $32,434, respectively.

                                       -4-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2006 and 2005

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

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

     The Partnership  defaulted on its purchase money secured by its interest in
Paradise  Foothills when the note matured on January 30, 1996, and was not paid.
Effective June 30, 2003, the Managing General Partner successfully negotiated an
agreement  to extend the maturity  date of the  purchase  money note to June 30,
2008,  and to reduce the interest  rate.  The purchase  money note  consisted of
principal and accrued interest of $230,000 and $1,130,275,  respectively,  as of
December  20,  2005.  On  December  20,  2005,  the  property  owned by Paradise
Foothills was sold. The sale resulted in net gain from extinguishment of debt of
$1,610,275 and in gain on disposition of investment in  partnerships of $773,834
for  financial  statement  purposes and a total gain of  $7,772,582  for federal
income  tax  purposes  in 2005.  The  Partnership  accrued  $140,400,  which was
included in gain on  disposition  of investment  in  partnerships  in 2005,  for
additional  proceeds  related to the sale which were  received in March 2006. In
accordance  with the terms of the Partnership  Agreement,  in December 2005, the
Managing General Partner was paid a disposition fee of $576,000  relating to the
sale. The fee was netted against the related gain from extinguishment of debt.

b.   Partnership 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 owned by Semper Village was sold. Net cash proceeds,
including a $14,923 Local  Partnership  reserve  received by the Partnership and
additional  proceeds received in the fourth quarter of 2004, totaled $6,334,534.
The sale resulted in net gain on  disposition of investment in  partnerships  of
$6,291,867 for financial statement purposes and in total gain of $10,793,171 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.  During the year of
2005, the  Partnership  received  additional  proceeds of $11,100 related to the
sale,  which is included in gain on disposition of investment in partnerships in
2005. In 2006, the Partnership received additional proceeds of $1,520 related to
the sale, which is included in gain on disposition of investment in partnerships
at June 30, 2006.

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

     On October 13, 2005,  the property  owned by Willow Creek II was sold.  The
sale  resulted in net gain on  disposition  of  investment  in  partnerships  of
$2,483,770 for financial  statement  purposes and a total gain of $4,000,139 for
federal income tax purposes in 2005. The Partnership accrued $269,439, which was
included in gain on sale of investment in  partnerships  in 2005, for additional
proceeds  related to the sale which were  received in March 2006.  In accordance
with the terms of the  Partnership  Agreement,  in October  2005,  the  Managing
General Partner was paid a disposition fee of $275,000  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

                             June 30, 2006 and 2005

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued

c.   Summarized financial information
     --------------------------------

     Combined  statements of operations for the two Local  Partnerships in which
the Partnership was invested as of June 30, 2005, follow (the Partnership had no
investments in Local  Partnerships by June 30, 2006).  [The combined  statements
have been compiled from  information  supplied by the  management  agents of the
properties and are unaudited.]  The information is presented  separately for the
Local Partnership which had investment basis (equity method),  and for the Local
Partnership  which  had  cumulative  losses  in  excess  of  the  amount  of the
Partnership's investment in that Local Partnership (equity method suspended).


                        COMBINED STATEMENTS OF OPERATIONS
                                   (Unaudited)

                                                  For the three months ended
                                                        June 30, 2005
                                                  ----------------------------
                                                   Equity
                                                   Method           Suspended
                                                 ----------         ----------
     Number of Local Partnerships                    1                  1
                                                     =                  =
     Revenue:
       Rental                                    $  258,148         $  269,393
       Other                                          4,552             23,969
                                                 ----------         ----------

         Total revenue                              262,700            293,362
                                                 ----------         ----------
     Expenses:
       Operating                                    166,590            156,458
       Interest                                      43,776             97,839
       Depreciation and amortization                 53,800             68,285
                                                 ----------         ----------
         Total expenses                             264,166            322,582
                                                 ----------         ----------
     Net loss                                    $   (1,466)        $  (29,220)
                                                 ==========         ==========
     Partnership's share of Local
       Partnership net loss                      $   (1,451)        $       --
                                                 -----------------------------
     Share of loss
       from partnerships                                   $(1,451)
                                                           =======

                                       -6-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2006 and 2005

                                   (Unaudited)


2.   INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued


                                                   For the six months ended
                                                         June 30, 2005
                                                 -----------------------------
                                                   Equity
                                                   Method            Suspended
                                                 ----------         ----------
     Number of Local Partnerships                    1                   1
                                                     =                   =
     Revenue:
       Rental                                    $  535,279         $  538,785
       Other                                         16,525             47,938
                                                 ----------         ----------
         Total revenue                              551,804            586,723
                                                 ----------         ----------
     Expenses:
       Operating                                    340,070            312,914
       Interest                                      87,552            195,678
       Depreciation and amortization                107,601            136,571
                                                 ----------         ----------
         Total expenses                             535,223            645,163
                                                 ----------         ----------
     Net income (loss)                           $   16,581         $  (58,440)
                                                 ==========         ==========
     Partnership's share of Local
       Partnership net income                    $   16,413         $      --
                                                 ----------------------------

     Share of income from partnerships                     $16,413
                                                           =======


     As of June 30, 2005 the  Partnership's  share of cumulative  losses to date
for one Local Partnership  exceeded the amount of the Partnership's  investments
in and advances to the Local  Partnership by $5,977,331.  As the Partnership had
no  further  obligation  to  advance  funds or  provide  financing  to the Local
Partnership,  the excess loss was not  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 $30,850 and
$69,053 for the three and six month periods  ended June 30, 2006,  respectively,
and $28,887 and $53,691 for the three and six month periods ended June 30, 2005,
respectively,  to the  Managing  General  Partner  as  direct  reimbursement  of
expenses  incurred on behalf of the  Partnership.  Such reimbursed  expenses are
included in general and administrative  expenses in the accompanying  statements
of operations.

     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 $0 and $24,480
for the three  month  periods  ended June 30, 2006 and 2005,  respectively,  and
$16,320  and  $48,960  for the six month  periods  ended June 30, 2006 and 2005,
respectively.

                                       -7-

<PAGE>
                 CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS

                             June 30, 2006 and 2005

                                   (Unaudited)


3.   RELATED PARTY TRANSACTIONS - Continued

     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  outstanding  Beneficial  Assignee
Certificates  representing  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
October  2005,  the  Managing  General  Partner  was paid a  disposition  fee of
$275,000  related to the sale of Willow Creek on October 13,  2005.  The fee was
netted against the related gain on disposition of investment in partnerships. In
December  2005,  the  Managing  General  Partner was paid a  disposition  fee of
$576,000 related to the sale of Paradise Foothills on December 20, 2005. The fee
was netted against the related gain from extinguishment of debt.


4.   DISTRIBUTION TO BAC HOLDERS

     On April 12, 2006, the Partnership made a final  distribution of $5,278,075
($249.46  per BAC  unit) to BAC  holders  of  record  as of April 7,  2006.  The
distribution  consisted of proceeds  received  from the sales of the  properties
related  to  Willow  Creek  and  Paradise   Foothills  in  2005  and   remaining
undistributed cash.

                                      # # #

                                       -8-

<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

     The  Partnership is currently in the process of dissolving its  operations.
The  Partnership is organized  under the laws of the State of Maryland.  Section
10-801(1)  of the  Maryland  Limited  Partnership  Act  provides  that a limited
partnership  is dissolved  and its affairs wound up upon the happening of events
specified in the Partnership  Agreement.  Pursuant to Section 8.01(a)(ii) of the
Partnership  Agreement,  the Partnership will dissolve 90 days after the sale or
other disposition of all Local Partnership Interests and substantially all other
tangible assets of the Partnership.

     The  Partnership  disposed  of its  last  remaining  investments  in  Local
Partnerships  in 2005.  The  Partnership  was  dissolved  under the terms of the
Partnership Agreement on March 20, 2006, but the winding up of the Partnership's
business may take several months more. In any event,  the  Partnership  will not
conduct  any active  business  operations  and will only take  actions  that are
required to further its own liquidation.

     The  Partnership's  final liquidation is anticipated to occur no later than
the end of its December 31, 2006 fiscal year and may occur as early as September
30, 2006. In April 2006, the Partnership  distributed all of the net liquidation
proceeds to its Limited Partners.  These liquidation  proceeds  represent all of
the proceeds which the Partnership expects to distribute to Limited Partners.

     The carrying value of the remaining assets and liabilities reflected in the
accompanying   June  30,  2006  and  December  31,  2005  financial   statements
approximates fair value.

                          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,  2005.  The
Partnership  accounted for its investments in partnerships (Local  Partnerships)
using the equity method  because the  Partnership  was a limited  partner in the
Local Partnerships.

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

     The Partnership originally made investments in eight Local Partnerships, of
which none remain at June 30, 2006.

     The  Partnership's  obligation  with respect to its  investment in Paradise
Associates  Limited  Partnership  (Paradise   Foothills),   in  the  form  of  a
nonrecourse  purchase  money note,  which had a principal  and accrued  interest
balance of $230,000 and $1,130,275,  respectively,  as of December 20, 2005, was
paid in full directly by the title company to the noteholder out of the proceeds
due to the Partnership upon the sale of the property owned by Paradise Foothills
in December 2005.  The amount due to the local general  partner of $174,600 plus
accrued  interest of $75,400 was written off upon the sale of the property owned
by Paradise Foothills.

     The Managing  General  Partner has received  consent from a majority of BAC
Holders for the liquidation of the Partnership.

                                       -9-

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


     On April 12, 2006, the Partnership made a final  distribution of $5,278,075
($249.46  per BAC  unit) to BAC  holders  of  record  as of April 7,  2006.  The
distribution  consisted of proceeds  received  from the sales of the  properties
related  to  Willow  Creek  and  Paradise   Foothills  in  2005  and   remaining
undistributed cash.

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

     The  Partnership's net loss decreased for the three month period ended June
30,  2006,  compared  to the  corresponding  period  in 2005,  primarily  due to
decreases in  management  fees,  audit fees,  legal fees and  interest  expense,
partially  offset by decreases in interest  revenue and gain on  disposition  of
investment  in  partnership,  and an  increase  in  general  and  administrative
expenses.  Interest expense decreased as no investments remain in 2006. Interest
revenue decreased due to a lower cash and cash equivalent balance in 2006.

     The  Partnership's  net loss  decreased for the six month period ended June
30, 2006,  compared to the  corresponding  period in 2005,  primarily  due to an
increase in interest revenue and decreases in interest expense, management fees,
legal fees and audit fees, partially offset by decreases in share of income from
partnership and gain on disposition of investment in partnership and an increase
in general and administrative  expenses.  Interest revenue increased in 2006 due
to higher interest rates.  Share of income from partnership and interest expense
decreased as no investments remain in 2006. General and administrative  expenses
increased due to  liquidation  costs.  The gains on disposition of investment in
partnership consist of rent collections relating to Semper Village sold in 2004.

     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
six month periods ended June 30, 2006 and 2005, did not include losses of $0 and
$28,925, respectively, and $0 and $57,849, respectively.

     No other  significant  changes in the  Partnership's  operations have taken
place during the three month period ended June 30, 2006.


Item 3. Controls and Procedures

     In July  2006,  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

                                      -10-

<PAGE>
Part I. FINANCIAL INFORMATION
Item 3. Controls and Procedures - Continued


error or fraud may occur and not be detected. Based on the July 2006 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.


Part II. OTHER INFORMATION
Item 5. Other Information

     There has not been any information  required to be disclosed in a report on
Form 8-K during the quarter ended June 30, 2006,  but not  reported,  whether or
not otherwise required by this Form10-QSB at June 30, 2006.

     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.

                               Cash Distributions
                               ------------------

     On April 12, 2006, the Partnership made a final  distribution of $5,278,075
($249.46  per BAC  unit) to BAC  holders  of  record  as of April 7,  2006.  The
distribution  consisted of proceeds  received  from the sales of the  properties
related  to  Willow  Creek  and  Paradise   Foothills  in  2005  and   remaining
undistributed cash.


Item 6. 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.

All other Items are not applicable.

                                      -11-

<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



August 11, 2006                        by:  /s/ H. William Willoughby
---------------                             ------------------------------------
DATE                                        H. William Willoughby,
                                            Director, President, Secretary,
                                              Principal Financial Officer and
                                              Principal Accounting Officer

                                      -12-