Foreign Inheritance Question and Rental Income

[Robocop2020]

Foreign Real Estate Inheritance Income Question

I have a very unique questions and hopefully, you guys can help me with their resolutions; my mom passed away, she is EU resident. THe official heirs of her properties is me, my sister and my dad - each getting 1/3.  I am the only 1, US resident for tax purposes. These rental properties have tenants and therefore real estate income and deductions attached to them. For these, prior the income tax have been paid in the EU country.

My understanding (please correct me if I am wrong), I need to file form 3520 for year 2020 and list my inheritance - or the 1/3 of the total fair value. The value is above 100K. Given this, my first question is on the fair value of the property - how is this determined?  Can I hire a third party certified appraisal to obtain the FV for the properties and list them on the form? are there any requirements on the selection of such company?

My second question - if I was to sign a side agreement with my dad, and give away my 1/3 rental income rights to these properties, that is for me to NOT receive any income from these properties and for him to pay fully the EU income taxes on my tax amount - would this trigger any tax issues? Example, property rental income is 100$ per year. My 1/3 is 33$. I sign an agreement not to collect any of these money; my father collects all, or 66 (his and my 1/3).  Me - 0$. I would never get these 1/3. My sister would be separate and file her own taxes.

From the top of my head, I am thinking this might create potentially gift tax issues, if the gifted income is above 15K but this could be resolved with the lifttime exemption. So, if any gift tax, i might just claim the exemption... please let me know you thoughts. or if I might be missing something. 

BTW, these are properties where people do not live in; rather rented for business purposes. Thank you. 

[Robocop2020]

I have a very unique questions and hopefully, you guys can help me with their resolutions; my mom passed away, she is EU resident. THe official heirs of her properties is me, my sister and my dad - each getting 1/3.  I am the only 1, US resident for tax purposes. These rental properties have tenants and therefore real estate income and deductions attached to them. For these, prior the income tax have been paid in the EU country.

My understanding (please correct me if I am wrong), I need to file form 3520 for year 2020 and list my inheritance - or the 1/3 of the total fair value. The value is above 100K. Given this, my first question is on the fair value of the property - how is this determined?  Can I hire a third party certified appraisal to obtain the FV for the properties and list them on the form? are there any requirements on the selection of such company?

My second question - if I was to sign a side agreement with my dad, and give away my 1/3 rental income rights to these properties, that is for me to NOT receive any income from these properties and for him to pay fully the EU income taxes on my tax amount - would this trigger any tax issues? Example, property rental income is 100$ per year. My 1/3 is 33$. I sign an agreement not to collect any of these money; my father collects all, or 66 (his and my 1/3).  Me - 0$. I would never get these 1/3. My sister would be separate and file her own taxes.

From the top of my head, I am thinking this might create potentially gift tax issues, if the gifted income is above 15K but this could be resolved with the lifttime exemption. So, if any gift tax, i might just claim the exemption... please let me know you thoughts. or if I might be missing something. 

BTW, these are properties where people do not live in; rather rented for business purposes. Thank you. 

[Carl]

Overall, you need to seek legal advice from a real estate attorney or real estate professional well versed in foreign property ownership. Since this is foreign rental property I am confident there is much more involved in this than I am aware of. Especially if the other owner's are not U.S. Citizens or legal immigrants with a green card and social security number or ITIN. Gift reporting requirements to a foreign person are not necessarily the same as they are for gifts to a U.S. Citizen.

my first question is on the fair value of the property - how is this determined? Can I hire a third party certified appraisal to obtain the FV for the properties and list them on the form? are there any requirements on the selection of such company?

You should get an official appraisal as soon as possible, unless you have some other documentation to somehow prove the FMV of the property on the date the original owner passed away. (Not the date you inheritied it. I.e.; not the date your name was put on the property deed.) Other than the appraiser be qualified/licensed, there is no special requirement. Note that a tax bill to prove FMV is generally not enough, unless you can show there is absolutely no other way possible to determine FMV. That's because in general (at least in the U.S.) the tax value of a property is significantly less than the FMV the property would sell for. Also, a tax value appraiser generally does not enter the property. Tax value is commonly determined by the square footage of land and the square footage (or footprint) of the property on that land. So a tax appraiser is not appraising a property's resale value. They are appraising the tax value. The tax value is commonly 30% (more or less) below the property's sale value.

if I was to sign a side agreement with my dad, and give away my 1/3 rental income rights to these properties, that is for me to NOT receive any income from these properties and for him to pay fully the EU income taxes on my tax amount - would this trigger any tax issues?

You don't give away your income.Just giving away the income does not relieve you of your obligation to pay property taxes or any other debt (such as a mortgage, utilities, upkeep costs, etc) and would still require you to report your share of income on  your tax return, and pay taxes on it "before" you gift that income to anyone else.  So long as you are a legal owner of the property, you would be gifting your income each and every year.

While it would not trigger tax issues per-se (but it will in the year the property is sold or otherwise disposed of, depending), you would need to completely give away any and all ownership claims you have to the property. This as you know, would be considered a gift. If the value of your gift given in any one tax year exceeds $15,000 to any one person, then you are required to report your gift to the U.S. Treasury Department on IRS Form 709 - Gift Tax Return.

Now don't let the name of that form mislead you. You will *NOT* pay any taxes on your gift. This is merely a reporting requirement that is not a requirement of the IRS. It is a requirement of the United States Treasury Department, of which the IRS is only a part of. The IRS Form 709 is *NOT* filed with your tax return, and is *NOT* included in any version of TurboTax, since it has nothing to do with taxes per-se.

Why they call it an "IRS" form 709 makes one think it's an IRS requirement. It is and it isn't. The reporting requirement is actually levied on the IRS by the Treasury Department who gets their marching orders from Congress. So I can only fathom that's why it's an "IRS" form.

Basically, you would need to give away your rights to any ownership in that property.

Overall, you need to seek legal advice from a real estate attorney or real estate professional well versed in foreign property ownership. Since this is foreign rental property I am confident there is much more involved in this than I am aware of. Especially if the other owner's are not U.S. Citizens or legal immigrants with a green card and social security number or ITIN. Gift reporting requirements to a foreign person are not necessarily the same as they are for gifts to a U.S. Citizen.

[Robocop2020]

Thank you for the great response. 

just a follow up, if I was to sign this side agreement, basically for me to receive 0 rent, all rent to go to my dad; would this trigger any income for me in the USA?

I would still be paying my property taxes, expense but I will not report them as deductions as there would be 0 income to offset. Basically the income goes to my dad and he pays his taxes on the full amount. 

I just wanted to make sure such scenario is ok.  I brought up the gift tax because some might consider me giving rent free could trigger a benefit for my dad and therefore be considered a gift. Therefore, to file a gift return form. Please let me know

[Anonymous_]

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@Robocop2020 wrote:

....if I was to sign this side agreement, basically for me to receive 0 rent, all rent to go to my dad; would this trigger any income for me in the USA?

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That might be problematic since U.S. taxpayers cannot disclaim income which rightfully belongs to them (you are essentially assigning the income to your dad after it is rightfully your income) and not report it as such.

You can, however, disclaim an inheritance and that is likely to have the same effect.

[Robocop2020]

Thanks for this... here is my final follow up, hopefully this would clear up the situation...I am thinking it should not be an issue to disclaim income which rightfully belongs to them — he is my thinking..in another situation. for example, let say I have a property and give it to my son to live in, rent free (pretty much as in my situation with giving rental income to my dad). There is no rental income in both cases (letting my son live in and also for the side agreement), in this situation, should I be liable to pay income taxes on this property in both situations for money I have not received and therefore disclaimed to others. 

[Anonymous_]

@Robocop2020 

In one scenario you are giving the fair rental value of property you own to your son free of charge; that would be a gift of the fair rental value of the property.

In the other scenario, the income has already accrued to your benefit and, as such, has to be reported as your income. You cannot disclaim income after the income has inured to your benefit; you can only report it and then gift the income subsequently.

Note that it does not matter whether you actually receive the income as long as the funds are available to you in one form or another. Further, income-shifting is looked upon with extreme disfavor by the IRS so use extreme caution.

[Robocop2020]

Can income be accrued if you agree not to collect or benefit by signing such agreement. That is, to just agree for my portion, the income would be only 1$ and 1$ only. In such situation, would a person be accruing for the total amount 1/3 of the rent or 1$ only?

[Anonymous_ · Accepted solution]

Yes, you can have an agreement to that effect, but you cannot thereafter be in actual or constructive receipt of any funds at any time. 

You still need to consult, in person, with an attorney to ensure any agreement is drafted properly.

[Robocop2020]

Thank you for taking this time. I agree, the agreement should state I don’t collect $ or benefits; give all of this to my dad ect. With no future ect 

[Carl]

Just keep a few things in mind with an agreement.

 - You still own 1/3 of the property and will have to report the disposition of your third on your tax return when ever the property is sold or otherwise disposed of.

 - I can't speak for how tenant/landlord laws work in another country. But should a tenant have cause to sue, you would not be exempt from being a named target in any legal action. This would include any potential legal action for debts due such as utilities, insurance, property taxes, mortgage payments, etc should the other owners stop paying them.

Upon seeking legal advice on this (which I assume you would do) you need to bring these things up.

Overall, since you have no desire to be involved with this property and are not seeking any gain from it as a rental, it makes no sense to have any ownership in it.  I would advise you do what's called a "quit claim" on the property giving all your rights of ownership to the other owner(s), wash your hands of it, and be done with it once and for all.

[Robocop2020]

I just wanted to say thank you for taking the time and for helping us with this tax situation. You provided us with many things, We did not even think about so this is excellent. so based on this, I think I have more or less the option of creating an agreement with the tenants for me to get paid only 1$ (More or less) and for the total rent or whatever they negotiate to my father and sister. At this point, I would have 0 benefits (or 1$ in my case) so no issues. I understand now what you mean to assigning or transferring the rental income and how this might affect my taxes, this might be problematic with my original side agreement plan of transferint the rental income.

as I am writing this, would an alternative and potentially easier option work - such as selling my rental receivable to my dad. That is, I am supposed to receive xx amount of rental income but with another agreement I am selling my rental income receivable for an amount, it could be 1$ Ect. Could this work out or the original option of new contract with 1$ rent would be better? 
Basically I am not interested in any rental income whatsoever as I have my own income from work. I just want my relatives to be getting the money and to help them with their finances. However, at the same time I would still like to maintain ownership because god forbids something happens in the future, loss of job ect to have something to rely upon. I don’t know if this makes sense.

thank you 

[Carl]

This is why talking to a professional is called for. You most certainly can sell your share. However, I do believe that when you sell your share to a relative at less than FMV, losses on the sale are not deductible. A real estate/tax professional can provide you more definitive details.

[Anonymous_ · Accepted solution]

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@Robocop2020 wrote:

.....at the same time I would still like to maintain ownership because god forbids something happens in the future, loss of job ect to have something to rely upon.

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That is exactly why you need a legal/tax professional, @Robocop2020; there is a difference between selling your interest in the property and selling your right to receive income that the property generates.

[Robocop2020]

Thank you