Inheritance or gift from foreign parent

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ketanco
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Inheritance or gift from foreign parent

Post by ketanco »

I am a naturalized US citizen. My parents are foreign who never lived or had any relation to US. As far as my US taxes are concerned, what is the difference if I inherit a house from my dad in the future, versus he gives this house to me as a gift now? The house is also located in my native country of course. I assume I will show this in my US tax return in either case? But, in addition to showing, will this create any tax liability for the US in either case?
As a note, I live in my native country since several years and do not plan to return to US soon, but if I lived in the US would your answer be different?
Mike Scott
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Re: Inheritance or gift from foreign parent

Post by Mike Scott »

I think you will need to seek advice from someone with experience in US/your country tax law.
Topic Author
ketanco
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Re: Inheritance or gift from foreign parent

Post by ketanco »

what does my native country tax law have to do here, I don't understand
toddthebod
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Re: Inheritance or gift from foreign parent

Post by toddthebod »

ketanco wrote: Tue Dec 20, 2022 10:05 am what does my native country tax law have to do here, I don't understand
Generally speaking when you have foreign income, you pay taxes in that country and get a credit on your US return. Also generally speaking gifts are not taxable to the recipient. So the house itself may not create any tax liability, but if you rent it out or sell it for a profit it gets complicated.
Backtests without cash flows are meaningless. Returns without dividends are lies.
Ranunculus
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Re: Inheritance or gift from foreign parent

Post by Ranunculus »

I have had several foreign inheritances wired to my account at a US bank and never had to report anything. The estates were settled abroad so I don't know anything about the foreign tax consequences. I had to open an account at Bank of America to have the funds transferred since my local credit union was unable to process foreign currency wires. I kept careful records of the inheritance details in the event of an audit but nothing ever happened.
UNCHEEL
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Re: Inheritance or gift from foreign parent

Post by UNCHEEL »

If you live in a state with Inheritance Tax (on the receiver, vs Estate Tax), you should check with a local tax professional. But, only a few do.
bsteiner
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Re: Inheritance or gift from foreign parent

Post by bsteiner »

Ranunculus wrote: Tue Dec 20, 2022 11:32 am I have had several foreign inheritances wired to my account at a US bank and never had to report anything. ...
Form 3520: https://www.irs.gov/pub/irs-pdf/f3520.pdf?
gavinsiu
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Re: Inheritance or gift from foreign parent

Post by gavinsiu »

I am not a tax person, but here's what I know based on some research done for my relatives.

In the US on the federal level, unless the estate is particular large, there are no inheritance tax. However, 6 states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have a state inheritance tax. I do not know the detail of these states, so you will have to look them up if you are in one of those states.

Your parents can send you money via wire. When a US citizen gives you money, they are limited to $16K (for 2022) or $32K for couple per year. You can gift more than limit, but that would eat away at the giver's lifetime gift tax exclusion. However, this only applies to US Citizens. A non-US citizen would not have this limit since they don't have a lifetime tax exclusion.

Note that you would probably still want to limit transfer to no more than $100K a year. Anything over $100K would have to be reported via Form 3520. I am not sure if going over that limit does anything but the form does not appear to be fun to fill out. Keep in mind that 100K means for the entire year, so 2 transfer of $50K would be counted as $100K a year.

Try not to transfer out of a foriegn trust. Exclusion for foreign trust is lower and probably raise Red flags. Even if you are doing nothing wrong, it's still a pain to deal with the IRS. Transfer out of a bank account is probably ok. Make sure it's a overseas wire transfer. Do not bring large amount of cash personally in bills when visiting.

Be real careful about having any account overseas personally. US has a report of Foreign bank and financial account (FBAR). As a US citizen, you have to report your foriegn accounts and there is a stiff penalty for failure (lots of money and prision). Make sure your parents for example don't add your name to their bank account. I don't see real estate in FBAR but if the real estate generate income, it would probably need to be reported. FBAR of course do not apply to your non-us citizen parents.
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ketanco
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Re: Inheritance or gift from foreign parent

Post by ketanco »

So do I not report it if the house value is less than 100 K, but if it is more then I use form 3520 to report it? I looked at form 3520 but couldn't understand.
And no, in the foreseeable future at least, I will live in this house so no income from it anytime soon.

Also about the limits you mentioned, I am not clear: this 100 K is the total limit value of things in lifetime that I can inherit / receive gift from my foreign dad? Or there is no such limit?

Yes everything in federal level because I am a resident of foreign country since several years. I asked about the case of living in US just for info.
gavinsiu
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Re: Inheritance or gift from foreign parent

Post by gavinsiu »

ketanco wrote: Wed Dec 21, 2022 1:36 pm So do I not report it if the house value is less than 100 K, but if it is more then I use form 3520 to report it? I looked at form 3520 but couldn't understand.
And no, in the foreseeable future at least, I will live in this house so no income from it anytime soon.

Also about the limits you mentioned, I am not clear: this 100 K is the total limit value of things in lifetime that I can inherit / receive gift from my foreign dad? Or there is no such limit?

Yes everything in federal level because I am a resident of foreign country since several years. I asked about the case of living in US just for info.
What I was talking about is cash gifts. If your father gives you less than $100K, you won't need to fill out the Form 3520. If he gives you $120K, then you would have to fill out the form. I don't think you will get tax but it's just paperwork. What you definitely have to watch out for is report any bank accounts you have that are not in the US. The penalty is stiff for not complying because of FBAR.

If your father is giving you a house, I can't answer real estate. FBAR does not appear to require you to report the house, but you probably have to report it as a gift in Form 3520 and you probably should hire a tax expert because this will be complicated and beyond the expertise of most of the members here. In addition, if you have not been reporting your foreign accounts, you defiinitely need to talk to a tax expert.

The 100K is just for reporting requirements. In the US, the inheritance tax is levy against the source of the inheritance. Since your parents are non-us citizen with no us ties, any inheritance will go to you inheritance tax free since US cannot levy inheritance tax against non-citizens. This is assuming that you don't live in some US related territory
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ketanco
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Re: Inheritance or gift from foreign parent

Post by ketanco »

I was not asking about bank accounts here, which of course need to be reported. I was asking about the house abroad in the form of gift or inheritance from foreign person, as I also wrote in my original question. That's it. I write again because we got off the original topic here, and someone may answer later. But as far as i understand in any case there will be no tax but just may be reporting, unless I lived in the US AND in one of those states, which doesn't apply to me... I will of course ask to accountant too, if/when it happens. Thanks
gavinsiu
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Re: Inheritance or gift from foreign parent

Post by gavinsiu »

So it's just the house then. What I am saying should be verified with a tax expert.

Gifts from foreign person are not taxed. If your father give you the house, he does not incurr a gift tax because he is foreign and there is no way for US to levy gift tax on a non-citizen. You do not get taxed because the US do not levy inheritance tax on the receiving end. The IRS only required that you report it on Form 3520 if it's over $100K US.

One thing to keep in mine is the step-up basis. This is not related to foreign taxation. Let's say today your father gives you the house and is $300K. 10 years later, you sell it for $500K, you now have a capital gain of $200K that might be taxed. If you live in the US, and you sell your house to buy another house to live in, you might get an exemption for that. I do not know if foriegn location have this exemption. Supposed in the future your father passes the house to you after he passes instead of giving it to you now, at death the house gets a step-up. So if the house is worth $500K at his death and you sell it immediately, it will have no captial gains.

This is something to keep in mind. There are plus and minus too getting the house now or later. For example, maybe you rather have the house now so you have control of it and use it as collatorial.
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Lee_WSP
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Re: Inheritance or gift from foreign parent

Post by Lee_WSP »

ketanco wrote: Wed Dec 21, 2022 1:36 pm So do I not report it if the house value is less than 100 K, but if it is more then I use form 3520 to report it? I looked at form 3520 but couldn't understand.
https://www.irs.gov/instructions/i3520# ... 1000190314
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cchrissyy
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Re: Inheritance or gift from foreign parent

Post by cchrissyy »

ketanco wrote: Wed Dec 21, 2022 11:18 pm I was not asking about bank accounts here, which of course need to be reported. I was asking about the house abroad in the form of gift or inheritance from foreign person, as I also wrote in my original question. That's it. I write again because we got off the original topic here, and someone may answer later.
i am not a lawyer and don't know anything about the foreign implications.
but i thought it might be helpful to say this - typically, in the US, when people inherit a house or money, or when a living person gives you a house or money, there is nowhere you put it on your taxes and the price does not matter.
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ZWorkLess
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Re: Inheritance or gift from foreign parent

Post by ZWorkLess »

cchrissyy wrote: Thu Dec 22, 2022 3:30 pm
ketanco wrote: Wed Dec 21, 2022 11:18 pm I was not asking about bank accounts here, which of course need to be reported. I was asking about the house abroad in the form of gift or inheritance from foreign person, as I also wrote in my original question. That's it. I write again because we got off the original topic here, and someone may answer later.
i am not a lawyer and don't know anything about the foreign implications.
but i thought it might be helpful to say this - typically, in the US, when people inherit a house or money, or when a living person gives you a house or money, there is nowhere you put it on your taxes and the price does not matter.
If you're not experienced in selling a home in the US, then definitely involve a tax attorney in your decisions, as home ownership has a whole slew of odd rules, loop holes, tricks, that are dramatically different than the way US tax law treats ANY other asset. If you don't have the generational knowledge of all those rules, you need to rely on an expert.

The value likely does matter if it is a house or anything else you may someday sell, as the "basis" goes along with the gift IME. Ie., when I was 25, my dad gifted me about 12k in stock, which came to me at his basis of 2c per share (so under $100 for that stock). So, when I sold it over the years, I paid capital gains on the difference between MY sales price and HIS purchase price. (So, for instance, sold 100 shares at $50 each, for $5000, purchase price was 2c/each, so $1 for the 50 shares, so I paid capital gains taxes on $4999.)

I can't guarantee this is what should have been done, but I do know that is what a CPA advised me to do in the 90s and that is indeed what I did.

So, my advice would be to talk to a tax attorney and understand what the "cost basis" will be when you eventually sell that home, as it'd be very important to your taxes. If you will need a "basis" as the cost your parent paid, then try to get documentation on it (what they paid for the house + costs of major improvements). Alternatively, if your "basis" will be the value at the time you get it transferred to your name, then get an appraisal or at minimum, print off some Zillow/RedFin/etc estimates of value and store them safely along with photos of the home's current condition, so at least you will have SOMETHING to base your "basis" on.

There'd be a very big difference in taxes if you sell 5 years from now for $1M . . . if your basis is today's appraised value (say, 800k) or your dad's basis (say 50k to 500k). You'd be looking at 5 figure tax differences, if not more, so it's surely worth ensuring you do what you can to plan ahead for that.

(Similarly, if you'd ever sell stocks or something else for a gain, again, determining and documenting your cost basis is relevant. But homes are a very complex tax beast in the US.)
gavinsiu
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Re: Inheritance or gift from foreign parent

Post by gavinsiu »

cchrissyy wrote: Thu Dec 22, 2022 3:30 pm i am not a lawyer and don't know anything about the foreign implications.
but i thought it might be helpful to say this - typically, in the US, when people inherit a house or money, or when a living person gives you a house or money, there is nowhere you put it on your taxes and the price does not matter.
The way it works is something call step-up basis. Let's say a relative of yours bought a house for $20K and is now worth $100k. If they sell it, it would have a basis of $20K. Let's say the relative passed away and you inherit the house. The house's basis is set the date they died. If you inherit the house and sell it immediately, you will have zero capital gains.

Let's say the house did not get sold for a few years and the house is now worth $150K. If sold, you would have to pay tax on the $50K. This would be true for bank accounts too. Any amount at death is tax free, but if there were additional interest since death there will be taxes. Generally, they try to close the estate as quickly as possible, after all of the debts and other arrangements are completed of course.
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cchrissyy
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Re: Inheritance or gift from foreign parent

Post by cchrissyy »

i think the OP was talking about being given a house to live in vs inheriting the same, and what tax reporting happens around the time they receive it. not about how to account for a future sale.
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gavinsiu
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Re: Inheritance or gift from foreign parent

Post by gavinsiu »

cchrissyy wrote: Thu Dec 22, 2022 10:35 pm i think the OP was talking about being given a house to live in vs inheriting the same, and what tax reporting happens around the time they receive it. not about how to account for a future sale.
Yes, if OP just lives there, there's nothing to report. If OP is given the house, oP has to report it if it's over 100K on form 3520 due to foreign transfer reporting limits. There is probably no taxes involved, but IRS wants to know.
Ranunculus
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Re: Inheritance or gift from foreign parent

Post by Ranunculus »

bsteiner wrote: Tue Dec 20, 2022 8:54 pm
Ranunculus wrote: Tue Dec 20, 2022 11:32 am I have had several foreign inheritances wired to my account at a US bank and never had to report anything. ...
Form 3520: https://www.irs.gov/pub/irs-pdf/f3520.pdf?
Thank you, I did not know about this form. Our previous (retired) tax preparer had said the inheritance was not taxable and did not need to be reported. It was over $100,000 though, so clearly we should have filed form 3520 with the return. It's only been a few years so I'll ask our current tax preparer how we should proceed, the fines for non-compliance are hefty.
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