Who must complete Part X
Every partnership that has a foreign partner, or where a foreign person has a US reporting obligation for any partnership item, completes Part X. There is one main exception: a domestic partnership with no ECI that, itself or through another withholding agent, has met its withholding and reporting obligations under chapters 3 and 4 does not need it.
- Who counts as foreign. The partnership can rely on Forms W-8 and W-9. A foreign individual who is a US resident under the substantial presence or green card rules is not a foreign partner.
- Pass-through partners. If a partner is itself a partnership, S corporation, trust or estate, it can tell the partnership whether any foreign person stands behind it. Without that information, the partnership must presume there is one and complete Part X for that partner.
- Who gets a K-3 Part X. Only foreign partners and pass-through partners. A US individual partner does not need one. But the K-2 must show the partnership's full figures, not just the foreign partners' share.
How Part X is laid out
Part X has three sections: Section 1, Gross Income; Section 2, Deductions, Losses, and Net Income; and Section 3, Allocation and Apportionment Methods for Deductions. Each line, from ordinary business income, rental real estate income and guaranteed payments to interest, dividends, dividend equivalents, royalties, capital gains, unrecaptured section 1250 gain and net section 1231 gain, is split across these columns:
| Column | What goes in it |
|---|---|
| (a) | Total |
| (b) | Partner determination |
| (c) | ECI, US source |
| (d) | ECI, foreign source |
| (e) | Non-ECI, US source FDAP |
| (f) | Non-ECI, US source other |
| (g) | Non-ECI, foreign source |
Why the split matters. ECI is taxed like a US taxpayer's income: on a net basis, at regular rates, on Form 1040-NR or Form 1120-F, and the partnership collects tax on it in advance under the section 1446 withholding rules on Forms 8804 and 8805. US source FDAP income, such as most dividends and interest, is generally taxed at a flat 30% of the gross amount, or a lower treaty rate, collected by withholding and reported on Form 1042. Some income is neither, and foreign source income that is not ECI is generally not taxed at all.
Partner determination. Column (b) holds items whose treatment depends on the partner. A common real estate example is rental income from US property: by default it is FDAP for the foreign partner, but the partner can elect to treat it as ECI so it is taxed on a net basis, after depreciation and expenses.
Real estate and FIRPTA
Gain on selling a US real property interest is treated as ECI for a foreign person under FIRPTA, even if the partnership would not otherwise be engaged in a US business. So a real estate fund that sells a US building reports the foreign partners' share of that gain as ECI in Part X, and generally withholds on it.
Part XIII: Foreign Partner's Distributive Share of Deemed Sale Items on Transfer of Partnership Interest
When a foreign partner sells or exchanges an interest in a partnership that is engaged in a US trade or business, section 864(c)(8) treats its gain as ECI to the extent of the ECI gain it would have been allocated if the partnership had sold all its assets at fair market value just before the transfer. A distribution that triggers gain for the partner counts as a transfer too.
Part XIII gives the partner what it needs for that calculation:
- Line 1: total ordinary gain or loss on a deemed sale of section 751 property, such as inventory and depreciation recapture;
- Line 2: the effectively connected part of that ordinary gain or loss; and
- Line 3: the effectively connected capital gain or loss on a deemed sale of everything else.
The partnership must complete Part XIII if it is notified of, or otherwise knows about, a transfer, and it is always treated as knowing about a distribution it makes. In a fund-of-funds structure, a lower-tier partnership can use Part XIII to pass the deemed sale figures up to the upper tier.
Separately, a buyer of an interest from a foreign partner generally has to withhold 10% of the amount realized under section 1446(f). The partnership itself may have to withhold from future distributions to the buyer if the buyer fails to.
Worked example
A foreign individual owns 10% of a US real estate fund that owns and operates apartment buildings, a US trade or business. The individual sells the whole interest for $1.5 million, and their basis is $1 million, so the gain is $500,000.
If the fund had sold all its assets at fair market value just before the sale, it would have recognised $4 million of gain, $3 million of it effectively connected. The partner's 10% share of the ECI gain is $300,000, reported on Part XIII.
- Of the $500,000 gain, $300,000 is treated as ECI and taxed in the US on Form 1040-NR.
- The other $200,000 is not ECI under section 864(c)(8). Because the fund holds US real estate, the partner should also check whether FIRPTA applies to it.
- The buyer generally withholds 10% of $1.5 million, that is $150,000, as a credit against the partner's US tax.
What this means for funds
- Funds with foreign LPs complete Part X every year, usually for every foreign and pass-through investor, so collecting W-8s and pass-through notices early saves a lot of presumption work.
- Real estate funds need to watch FIRPTA, net-basis elections on rental income and section 1446 withholding together.
- Secondary sales by foreign LPs require a deemed sale calculation for Part XIII, often at short notice, so funds should keep an up-to-date view of the ECI gain built into their assets.
This explainer is general information, not tax advice.
Sources
- Instructions for Schedule K-2 (Form 1065) and Schedule K-3 (Form 1065) (2025), IRS
- Schedule K-3 (Form 1065) 2025, IRS
- 26 U.S. Code § 864, Cornell LII
- 26 U.S. Code § 1446, Cornell LII
Related reading
This explainer is analysis and general information, not tax, legal or investment advice.