Help with a partnership with foreign partners

Technical topics regarding tax preparation.
#1
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My client is a family owned, domestic partnership with Canadian partners that sold a condominium they have owned and rented in Hawaii for many years.
The gain I understand is Effectively Connected Income, the gain is $199,000. A little over $52,000 was withheld in escrow for taxes and all four members have been issued an 8288-A for their percentage of the wittholding under the rules for FIRPTA
. There is a nonpassive loss of $167,000. Do I have to report the gain as "unrecaptured 1250 gain" on form 8804? Doing so assesses taxes on the total gain, and wants to apply the withheld amount then allows a refund of a little over $3,000, and the loss is completely lost. If I can carry it over to the 1040-NR, there is no tax and each partner receives a refund of their withheld amount, which is what we were expecting.
 

#2
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I'm still reading about this, and just found an instruction sheet that makes me feel like we're OK. The 8804 calculation is for a withholding amount only, the tax being calculated is a projected tax amount based on one figure, and we will carry the information to the 1040-NR where the passive loss will be applied. Does that sound right?
 

#3
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All that sounds right.

I did a Form 8804 last year for the first time.

As I recall, you can take certain deductions (such as state income tax on that income) into account when figuring the withholding amount. I don't know whether that loss you mentioned could be taken into account or not; there's a regulation that addresses what you can and can't count.

But as you figured out, it doesn't really matter, because the loss will be allowed under the normal rules on Form 1040-NR (at least, as normal as it gets on a 1040-NR), and they'll get a refund of the tax withheld.
 

#4
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Thanks beardenjv. I'm going nuts researching this, but last night I was directed to the 8804-C which is the certificate the 8804 wants to have from the foreign partner stating that either a reduced amount of partnership income or zero income will be subject to tax, including a passive loss carryforward. So I'm working on satisfying the requirements for that now. the 8804 has a line to enter the amount that would not be subject to tax and it will zero out the obligation, then on the 1040-NR we'll file and apply the passive loss which leaves each partner with net income of $6,000, which is too small to be taxed. So each partner will have the amount on their 8288-A refunded.

I really don't see how IRS can make this more complicated if they tried. Another problem with this is that so much time has been spent researching how to file all of this, how do I charge the client. The return is usually in the $700 range and with all the time spent doing the research it's well over $1,000 now.
 

#5
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Sorry, you've gotten further into it than I had to research last year, I don't think I'll be any further help to you.

Regarding the fees: I figure any kind of foreign issues should be charged through the nose. You're spending all that time researching it, and are they really going to go to H&R Block to find something cheaper for a partnership with a foreign partner? In hindsight, you should have warned them up front that your fee would be much higher this year. (And I'm also telling myself the same thing about the Form 8804 I did last year and didn't quote high enough; I just recently gave them a higher price for this year.)
 

#6
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The fee I usually charge is already a lot higher than it would be for an easier return. There is virtually no income each year, but now they've sold the property. I really didn't expect this to be so incredibly complicated. Anyway, thanks for weighing in.
 


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