Foreign Real Estate Gift: (how) does Stepped-up Basis Apply?

Forum|Forum|4 years ago
June 29, 2022
16 replies
807 views

I would very much appreciate your input on this problem:

My mother wants to gift me the apartment that she lives in in Germany. I am a US tax person, she is not. The transaction would have restrictions such as her lifelong usufruct of the property as well as revocation rights under certain conditions.

My concern is what would happen in the future after her passing: Would I be taxed on the gains based on sales price minus her original purchase cost or on the stepped up basis (either the date of gift or the date of her death, which is when I practically fully "receive" the gift). Both stepped-up bases are supposedly much higher than than her purchase cost.

I found the following information online: " If the beneficiary is a U.S. person, Lifetime gifts to children may result in a high U.S. capital gains tax when the donee sells the property as he may not qualify for the stepped-up basis. However, by using German estate planning instruments, e.g. a usufruct (Nießbrauch), a habitation right (Wohnrecht) or a revocation right (Widerrufsrecht), the stepped-up basis may also be available in case of lifetime gifts."

Could anybody please explain the "may" to me: under which circumstances would I or would I not qualify for the stepped-up basis? How would the contract need to be framed in order to qualify?

Not A Product Question

Mike9241

Level 15

see this article about inherited real estate. basically, rev rul 86-139 says you get a step-up in basis for real property inherited from a non-resident alien despite the fact it is not subject to US estate taxes.

https://www.hodgsonruss.com/newsroom-publications-11026.html#:~:text=Rev.%20rul.%2084-139%20%281984-2%20CB%20168%29%20provides%20that,property%20is%20not%20subject%20to%20US%20estate%20tax.

what you cite is what happens if mom gifts you the property before she dies. then you get her basis and thus any gain when you sell is subject to US income taxes.

my reading of the rev-rul and the article by the law firm would indicate that if you are gifted d any part of the property before she dies, you get absolutely no step-up. see a lawyer who is knowledgeable in foreign inheritance and gifts. you may want to contact your state bar association to see if it can provide referrals.

Mike9241

toyaa0Author

Level 2

Thanks so much for your answer and input, Mike! Yes, I am looking for ways / conditions that a stepped-up basis can apply to a gift, not inheritance

TomD8

Alumni - Champ

Here's the text of the U.S. law regarding the cost basis of gifted property:

https://www.law.cornell.edu/uscode/text/26/1015

As far as I know, there is no provision in the U.S. tax code for applying a stepped-up basis to gifted property.

**Answers are correct to the best of my ability but do not constitute tax or legal advice.

pk_

Level 15

@toyaa0 having read through all the posts/ responses by my very erudite friends/ colleagues, viz. @TomD8 , @Anonymous_ , @Opus 17 @and @Mike9241 , whereas I agree with all the comments but I read the whole situation a bit different and question the applicability of US tax laws till some conditions are fulfilled.

1. As i read the post , especially since right of use, right to revoke the gift ( under certain conditions ) and life-estate are retained by the donor --- this amounts to only a promise to gift rather than an actual gift/transfer of assets.

2. the donor , a non-US person, with assets in a foreign land, establishes these retained rights and promises under laws of Germany which cannot be contravened by US tax laws since the donor nor the assets are under US jurisdiction.

3. the right to use ( till death), to sell/ transfer, the right to revoke /Widerrufsrecht ( despite being conditional ) implies "transfer" with right to claim back -- all these to me imply a "promise " and not an actual transfer -- thus it is not a gift free and clear.

4. Therefore I am assuming it is a promise ( as in a will -- I give by son ..... ) that only comes into consumation on the death of and therefore extinction of the primacy rights of the donor. So for US purposes the estate comes into being at the death of the decedent and the promise becomes a reality. At this point US laws of inheritance applies to the beneficiary, not prior to that.

IMHO