Tax consequence of inheriting international property

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mvc
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Tax consequence of inheriting international property

Post by mvc » Sat Sep 22, 2018 2:26 pm

Dear Bogleheads,

I am looking to get some advice on the tax consequence of inheriting international property. My father-in-law is a citizen of India. As he is aging, we are in the process of moving him to an assisted living home. He is thinking of transferring the house to his children (my wife and her sister) before he moves into the assisted living home. My wife and her sister do not plan to sell this property in the foreseeable future. My question is, because my wife will inherit this house before her father passes away, will we owe taxes to the IRS or the state. My wife and I are US citizens and live in Maryland. I would appreciate any estate tax expert here who can provide some advice in this situation.

Thanks
mvc

Gill
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Re: Tax consequence of inheriting international property

Post by Gill » Sat Sep 22, 2018 2:47 pm

You will not owe anything to the IRS or your state. I can't comment on the tax consequences in India.
Gill

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HueyLD
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Re: Tax consequence of inheriting international property

Post by HueyLD » Sat Sep 22, 2018 2:54 pm

If the value of the gift is more than $100,000, your wife will have to fill out form 3520.

https://www.irs.gov/pub/irs-pdf/f3520.pdf

https://www.irs.gov/pub/irs-pdf/i3520.pdf

Keep in mind that filing a form does not mean you have to pay any tax.

mvc
Posts: 16
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Re: Tax consequence of inheriting international property

Post by mvc » Sat Sep 22, 2018 5:40 pm

Gill wrote:
Sat Sep 22, 2018 2:47 pm
You will not owe anything to the IRS or your state. I can't comment on the tax consequences in India.
Gill
Gill, Thank you very much. I have a follow-up question. Am I correct to assume that when my wife eventually sell the house sometime in the future, she will be taxed on a stepped-up basis (i.e., sale price minus fair market value on the date the gift transfer took place). I also suppose that she has to report any rental income to both countries.

I will find out the tax consequences within India.

Thanks
mvc

mvc
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Re: Tax consequence of inheriting international property

Post by mvc » Sat Sep 22, 2018 5:41 pm

HueyLD, Thanks for the links.

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HueyLD
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Re: Tax consequence of inheriting international property

Post by HueyLD » Sat Sep 22, 2018 5:46 pm

mvc wrote:
Sat Sep 22, 2018 5:40 pm
Gill wrote:
Sat Sep 22, 2018 2:47 pm
You will not owe anything to the IRS or your state. I can't comment on the tax consequences in India.
Gill
Gill, Thank you very much. I have a follow-up question. Am I correct to assume that when my wife eventually sell the house sometime in the future, she will be taxed on a stepped-up basis (i.e., sale price minus fair market value on the date the gift transfer took place). I also suppose that she has to report any rental income to both countries.

I will find out the tax consequences within India.

Thanks
mvc
Not Gill, but she will NOT get get a basis step-up on the gift date. According to the US law, her basis in gifted asset is the same as her father's basis, or 1/2 of his basis if the house is equally owned by two siblings.

In order for the basis to step up, she will have to inherit it, that is, after the death of her father.

mvc
Posts: 16
Joined: Mon Nov 26, 2007 12:03 pm

Re: Tax consequence of inheriting international property

Post by mvc » Sat Sep 22, 2018 8:32 pm

HueyLD wrote:
Sat Sep 22, 2018 5:46 pm
mvc wrote:
Sat Sep 22, 2018 5:40 pm
Gill wrote:
Sat Sep 22, 2018 2:47 pm
You will not owe anything to the IRS or your state. I can't comment on the tax consequences in India.
Gill
Gill, Thank you very much. I have a follow-up question. Am I correct to assume that when my wife eventually sell the house sometime in the future, she will be taxed on a stepped-up basis (i.e., sale price minus fair market value on the date the gift transfer took place). I also suppose that she has to report any rental income to both countries.

I will find out the tax consequences within India.

Thanks
mvc
Not Gill, but she will NOT get get a basis step-up on the gift date. According to the US law, her basis in gifted asset is the same as her father's basis, or 1/2 of his basis if the house is equally owned by two siblings.

In order for the basis to step up, she will have to inherit it, that is, after the death of her father.


hueyLD,
Thanks a lot for pointing out that. That could be a reason to seek to inherit this later rather than receive it as a gift. I will have look into this further. Thanks again - this is important for us.

Best
mvc

47Percent
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Re: Tax consequence of inheriting international property

Post by 47Percent » Sun Sep 23, 2018 8:35 am

mvc wrote:
Sat Sep 22, 2018 2:26 pm
Dear Bogleheads,

I am looking to get some advice on the tax consequence of inheriting international property. My father-in-law is a citizen of India. As he is aging, we are in the process of moving him to an assisted living home. He is thinking of transferring the house to his children (my wife and her sister) before he moves into the assisted living home. My wife and her sister do not plan to sell this property in the foreseeable future. My question is, because my wife will inherit this house before her father passes away, will we owe taxes to the IRS or the state. My wife and I are US citizens and live in Maryland. I would appreciate any estate tax expert here who can provide some advice in this situation.

Thanks
mvc
Unless you have emotional attachment to the property -- I mean extreme emotional attachment -- I would do one of the two things:

a) Have your FIL sell it now and gift the money to the daughters. (India indexes for inflation, so CG should be manageable)
b) Have the sisters inherit the property and sell it as soon as the property is inherited -- so that CG is practically zero because of the step-up.

The second one is preferable, but you will have to figure out how the property is maintained in the meantime. Absentee ownership is not really that easy in a place like India.

Gift taxes are payable by the donee (receiver) in India, whereas in the US it is the donor's responsibility. In any case, India has exceptions for close relatives and the gift tax does not apply in this case.

The reason for the above is that, although India and US have tax treaties to avoid double taxation in place, it is quite cumbersome and it is not a dollar for dollar reduction in taxes. You pay the taxes in India first -- but will have to include the entire gains in the US income and calculate the full-up taxes. Then calculate the pro-rata taxes due to the increased foreign income and offset it against taxes paid. While it sounds reasonable, you end up losing quite a bit in the process because of tax brackets, missed deductions, exchange rates, year-boundaries etc. etc.

Also, the paperwork for any income from outside the US is horrendous. . You are treated exactly as a money maven with off-shore bank accounts presumably to evade US taxes, but without the high-priced accountants to help you. If you are planning on renting out the property you will have to worry about the paperwork every year with the added fun of mis-matched tax years.

It is doable.. but just know what you would be signing up for.

Gill
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Re: Tax consequence of inheriting international property

Post by Gill » Sun Sep 23, 2018 1:32 pm

47percent, you appear very knowledgeable about the tax treaty with India. Are you certain there is a stepup in basis for an India decedent?
Gill

47Percent
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Re: Tax consequence of inheriting international property

Post by 47Percent » Sun Sep 23, 2018 2:08 pm

Gill wrote:
Sun Sep 23, 2018 1:32 pm
47percent, you appear very knowledgeable about the tax treaty with India. Are you certain there is a stepup in basis for an India decedent?
Gill
You are right. There is no step-up in India for inheritance.. but you do get the benefit of the inflation indexing right from the time of original purchase. While reporting it in the US, you get the step-up. So, you don't have to worry about the US side -- which is what I was thinking of.

I should have been clearer.

Gill
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Re: Tax consequence of inheriting international property

Post by Gill » Sun Sep 23, 2018 2:13 pm

47Percent wrote:
Sun Sep 23, 2018 2:08 pm
Gill wrote:
Sun Sep 23, 2018 1:32 pm
47percent, you appear very knowledgeable about the tax treaty with India. Are you certain there is a stepup in basis for an India decedent?
Gill
You are right. There is no step-up in India for inheritance.. but you do get the benefit of the inflation indexing right from the time of original purchase. While reporting it in the US, you get the step-up. So, you don't have to worry about the US side -- which is what I was thinking of.

I should have been clearer.
So you are saying that when there is a subsequent sale by a US taxpayer the asset has a basis equal to date of death value?
Gill

bsteiner
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Re: Tax consequence of inheriting international property

Post by bsteiner » Sun Sep 23, 2018 2:32 pm

47Percent wrote:
Sun Sep 23, 2018 2:08 pm
Gill wrote:
Sun Sep 23, 2018 1:32 pm
47percent, you appear very knowledgeable about the tax treaty with India. Are you certain there is a stepup in basis for an India decedent?
Gill
You are right. There is no step-up in India for inheritance.. but you do get the benefit of the inflation indexing right from the time of original purchase. While reporting it in the US, you get the step-up. So, you don't have to worry about the US side -- which is what I was thinking of.

I should have been clearer.
From time to time we need to coordinate with tax/estates counsel in India. It's hard to find them, especially since India is a large country so we sometimes want one in a particular part of India. If you are one, or if you know of any, let me know (privately if you prefer not to post the information).

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Watty
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Re: Tax consequence of inheriting international property

Post by Watty » Sun Sep 23, 2018 2:56 pm

If they keep the property then one thing to do if they live in the US would be to make sure that your wife and sister sister have appropriate wills that will be valid in both he US and India for settling their estates some day. If the wills are not set up right there could be a mess for their heirs and require the heirs to spend a lot in legal fees and it could take a lot time to settle the estate.

I don't know about India but some counties have very different inheritance laws than the US. Even if they are relatively young it would be good for them to do this since unexpected things can happen.

47Percent
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Re: Tax consequence of inheriting international property

Post by 47Percent » Sun Sep 23, 2018 7:50 pm

Gill wrote:
Sun Sep 23, 2018 2:13 pm

So you are saying that when there is a subsequent sale by a US taxpayer the asset has a basis equal to date of death value?
Gill
Only for US tax reporting.

For Indian tax reporting, the basis still remains as original purchase price. But whether sold by original owner or by inheritor, in India real property basis gets indexed for inflation for cap gains calculations (similar to what the current administration announced was contemplating). With annual inflation percentage regularly in the mid single digits, that really makes a difference for cap gains tax.

mvc
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Re: Tax consequence of inheriting international property

Post by mvc » Wed Sep 26, 2018 9:56 pm

47Percent wrote:
Sun Sep 23, 2018 7:50 pm
Gill wrote:
Sun Sep 23, 2018 2:13 pm

So you are saying that when there is a subsequent sale by a US taxpayer the asset has a basis equal to date of death value?
Gill
Only for US tax reporting.

For Indian tax reporting, the basis still remains as original purchase price. But whether sold by original owner or by inheritor, in India real property basis gets indexed for inflation for cap gains calculations (similar to what the current administration announced was contemplating). With annual inflation percentage regularly in the mid single digits, that really makes a difference for cap gains tax.

47Percent,
Lot of information here. Can you tell what will happen if the house get transferred now to my wife and her sister through settlement in India and they sell the house only few years after their dad's death . How will that affect the taxes in India and in the US. I know that we may have to rent the house for few years and it could be a pain to handle the papers. But there are some family reasons why we may have to go through this option.

Some articles I read over the internet suggested that there is no tax liability for foreign gifts - for example https://freemantaxlaw.com/foreign-inher ... ZBEALw_wcB.

Lot of things to chew for me. Thanks a lot for your insight.

mvc

47Percent
Posts: 349
Joined: Tue Oct 29, 2013 9:59 pm

Re: Tax consequence of inheriting international property

Post by 47Percent » Wed Sep 26, 2018 11:42 pm

mvc wrote:
Wed Sep 26, 2018 9:56 pm


what will happen if the house get transferred now to my wife and her sister through settlement in India and they sell the house only few years after their dad's death . How will that affect the taxes in India and in the US. I know that we may have to rent the house for few years and it could be a pain to handle the papers. But there are some family reasons why we may have to go through this option.

Some articles I read over the internet suggested that there is no tax liability for foreign gifts - for example https://freemantaxlaw.com/foreign-inher ... ZBEALw_wcB.

Lot of things to chew for me. Thanks a lot for your insight.

mvc
There is no tax liability in the US for inheritance or gift, domestic or foreign.
The link you provided talks only about the reporting requirements -- which as I mentioned can be quite involved.

I am not a tax-pro or a lawyer. These are just from my reading up and some experience.

In your scenario..

When the inheritance happens:
you will have reporting requirements in the US.. no tax liability
Not completely sure of the paperwork required in India, but my guess is it will be taken care of as part of the settlement.
No taxes in India either; there is no inheritance tax in India; not 100% sure if it is a general rule or only applies for close relatives mirroring the gift tax rule. But in any case, no tax in your case.

When you rent:
Pay income tax in India, as well as in the US with some accommodation for taxes paid in India; Also US reporting requirements.
The depreciation you take will be based on the US basis. see below; .. and you will have to use 40 year depreciation.

When you sell:
Pay cap gains tax in India (basis = original basis at purchase, indexed for inflation)
Pay cap gains in the US (basis = value at the time of inheritance; Need to have supporting docs; adjust for depreciation deductions), with some accommodation for taxes paid in India.

Then you need to worry about bringing the money out of India.. which will involve quite a bit of paperwork and a public accountant's help.

mvc
Posts: 16
Joined: Mon Nov 26, 2007 12:03 pm

Re: Tax consequence of inheriting international property

Post by mvc » Sun Oct 07, 2018 4:10 pm

47Percent,

Thank you very much. My wife's family has decided that the property will transfer only after my father-in-law's time. I am relieved that I don't have to do any paperwork for the time being. When she eventually inherits, we will file the paperwork as required.

Also, thanks to everyone who responded to my question.

mvc

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