Re: Gift / Inheritance Form a Foreign Person. Form 3520-Gift Tax.

Forum|Forum|2 years ago
June 3, 2024
2 replies
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hello,

I have confusion about when an inheritor can truly sell an inherited real estate and when to file form 3520.

My father died in 2023 and we started probate (succession) paying inheritance taxes in 2023, about 7 months after is death.Ineritance was real estate parts (other parts I already owned since mom died) and cash. I did not file form 3520 believing it was just the cash. And the cash was not given to me from the bank before 2024. So I was expecting to file 3520 in 2024. Meanwhile I decided to sell some of the real estate, and it was not possible before I did the transcription of the inheritance acceptance. Only then we could sell. So we got that transcription the same day we sold the property. In 2024. So tecnically I could not sell the property in 2023. Because there was not transcription of the acceptance of inheritance. Which in my country of origin is necessary to guarantee the buyer that I actually really inherited that asset and not just apparently. So would this fact make the reporting time pertain the year 2024? so basically filing form 3520 for both real estate and cash in 2025?

jtax

Level 10

First, I am very sorry for your the loss of your father and your mother.

I am not sure your analysis is correct. This topic is very complex with potentially (but perhaps not likely???) large penalties involved. Too complex for a clear answer on an Internet forum. I strongly suggest that you find a tax attorney, CPA, or enrolled agent who regularly deals with form 3520.

Look carefully at the instruction section "Who Must File" in https://www.irs.gov/pub/irs-pdf/i3520.pdf

It says, in part,

4. You are a U.S. person who, during the current tax year, received either:
a. More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests;

The important word here, to me, is "received." Without more research I don't see why received refers only to cash. Most US tax law includes property valued at it's fair-market value. So employers can't give you a free car and pretend it's not compensation.

The legal question would be whether or not, in 2023, you owned (had "received") the real estate or not. You could well be considered the owner as soon as your father passed. This would be the case in many US states. Or you might not be the owner until that form was obtained. I doubt anyone here can answer that.

Note that if you got an extension for your 2023 1040 until October, the 3250 for 2023 would not be due until October. If that's the case, you might want to just file the 3250 for 2023 and be done with it. See "When and Where To File" in the instructions. There are a few more exceptions. Even if late you might want to just file it for 2023 if that is the correct year. But a tax professional who frequently deals with this can advise you on that.

Also, just to avoid any confusion. Your subject says "gift tax." The US federal tax system does not have a tax on gifts received. See https://www.law.cornell.edu/uscode/text/26/102 ...

But there is a tax on gifts GIVEN (above a very high limit). This would not apply if your parents were non-(US)resident aliens. I.e. it only would apply if they were US persons (citizens or green card holders).

The 3520 is not about a gift tax. It is about asset reporting. It is so the US government is on notice that there are foreign assets now owned by a US person and that the US person is therefore more likely to report any income from those assets (rental income, capital gains, dividends, etc.)

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pk_

Level 15

@friendassistance having read through your post and generally agreeing with response from my colleague @jtax , I would like to add:

(a) form 3520 ( unless you were the owner or received assets/ income from a foreign trust etc. ) section IV is generally limited to currency equivalent of US$100,000 or more. There is generally no tax on it but you have to report this for the tax year when you received the cash equivalent .

(b) If you had a bank account that you owned or had signatory power over ( nominee ) the that may come under FBAR ( form 114 at FinCen.gov ) and /or FATCA regs.

(c) On the realestate that you received as beneficiary ---- your basis in the property ( for US purposes ) is FMV on the date pf passing of the decedent. There is no reporting requirement of real-estate / immovable property till disposal. On disposal , you have to recognize the gain ( capital or otherwise ) and pay the taxes .

(d) If you are taxed by the foreign taxing authority then & in concert with any Tax Treaty conditions (between US and that country), that foreign tax may be eligible for US tax credit

(e) The date of your actual ownership of the asset is not a tax event and does not play into gain computation.

Is there more one of us can do for you ?

jtax

Level 10

BTW, @friendassistance we are assuming that you are a US citizen or permeant resident. If not let us know. That might change a lot.

As usual @pk12_2 adds some very help elaborations. This is all so complicated that it is very helpful to be very clear.

Re: @pk's (b) the FBAR / fincen 114, filing requirement. That is an excellent point. Note the reporting requirements for that are the you have ownership or a certain control of the bank account and that the amount triggering a report is $10k USD equivalent in any foreign bank account at anytime during the year. See https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar and https://bsaefiling.fincen.treas.gov/main.html for more information.

Re: (c) basis of the real estate. Note this is about US income tax (1040) (not gift tax). Income includes the gain from sale of property. Gain is sale price - basis (oversimplified a bit). Basis of inherited property is, as @pk describes, the FMV (fair-market value) of the property as of the date of death. Usually the gain from inherited real estate promptly sold is zero or even a loss (because of the expenses of the sale and because the value won't have changed much from the date of death) https://www.law.cornell.edu/uscode/text/26/1014

Re: (d) tax paid to a foreign country. @pk is talking about income taxes. The inheritance tax that you paid is not considered for US income tax purposes (form 1040). I don't think you can add it to your basis, but again I think you need a professional to advise you. It might or might not be an offset if you had US estate taxes, maybe based on a treaty. But that wouldn't apply unless your parents were US persons and their estate was very large. It might not apply even then because the foreign tax was an inheritance tax not an estate tax.

Here are two law firms' articles on the subject. I'm sure you can find others with a quick search. They could be a good starting point. Ask how much an hour or two of their time would cost. Could be well worth it. One of them offers a free 30-minute consultation.

https://www.jdkatz.com/a-comprehensive-guide-for-u-s-citizens-inheriting-assets-from-abroad/

https://ceritypartners.com/insights/receiving-an-inheritance-from-abroad-special-considerations-for-u-s-taxpayers/

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