Hello everyone,
I have questions regarding inheritance and form 3520.
My relative died and I received a real estate and some cash totaling more than $100,000 in a foreign country.
My relative was a foreign person and I'm a US citizen. I understand that I have to report this to the IRS and file a paper form 3520 Part IV.
My questions:
Do I have to report real estate also or only cash gifts? The real estate value is greater than cash I received.
If I have to report real estate properties, do i have to describe details about the property?
My relative died in December 2021, but all inheritance we received in January 2022 (legal procedure overseas). Should I mail the Form 3520 by April 2022 (for 2021 tax year) or April 2023 (for 2022 tax year)?
Thank you,
You must report the entire value of the inheritance, using the US dollar value as of the date of the person's death, not just the cash. Separately, you need to file an FBAR report if you had at any time, a foreign bank account with more than $10,000 US equivalent in it (even if you later closed the account and transferred the funds to the US). The FBAR would be filed for 2022, since it sounds like you didn't have money in the account in your name until 2022.
Yes you need a description of the real estate, but it does not have to be lengthy. ("Apartment 612 at 123 Fake Street, Berlin", or "15 hectares of vacant land in Lazio province, Italy"). See the form 3520.
I'm not sure when to report the inheritance. Due to the need to close probate and the doctrine of constructive receipt, I would think it is more likely to be a 2022 inheritance (since you couldn't actually spend the money or sell the property until 2022). 2022 is when the property was distributed from the estate to you.
@pk any comments?
One important note you did not raise: whenever you sell the real estate, you will owe capital gains tax based on the gain in value over your cost basis, which is the fair market value on the date the previous owner died. It will be worth it to get a qualified appraisal now even if you have to pay for it, it could save you a lot of money later.
@ParkNYC , having gone through the original post and the answer , I agree with @Opus 17 that :
(a) the fair market value of the real-estate and any other non-cash assets received as part of the inheritance by a US person ( Citizen/Green Card / Resident ) on the date of the demise of the decedent or on an alternate date shortly thereafter is the BASIS of the asset(s) for the recipient/inheritor.
(b) any gain in disposing these assets would generally be treated as long-term / Capital gain and taxes as such. Hence a proper valuation for purposes of establishing basis is a very good idea
(c) Form 3520 needs to be filed as part of the return for the year in which the inherited assets were constructively received e.g. in case of realestate, it is the date on which the property was transferred to you , not necessarily the date on which the title is registered and returned to you ( e.g. in Mexico it is the date on which the Contrato de Venda is signed, and funds exchanged --- in front of a notario ---not when actual escritura -- "title" -- is registered and returned to the buyer -- think it is often the case in many countries )
(d) FBAR filing is separate from the return and is due by June 15 the following and done as on line filing at FinCen.gov for form 114 -- this will take you to bsa-efiling site which operates the facility.
(e) Additionally there is NO tax impact of the inheritance itself and therefore there is no foreign tax credit eligibility ( if the foreign taxing authority taxes the transfer of ownership from the decedent to the inheritor ). In case of disposal of assets resulting in gain, this taxed by the US ( Fed and State ) and if taxed by the foreign taxing authority, eligible for foreign tax credit.
Thank you @Opus 17 -- it was a very good answer
Thank you @Opus 17 and @pk. I've been filing FBAR yearly for a while because I own foreign accounts.
I understand that I'd have to include and report value of the real estate properties also. My main question still is: when should I file the form 3520, in 2022 for year 2021 or in 2023 for year 2022? I don't want to make mistakes here and I would prefer to do it in 2021, but I think it would make more sense to file the form for a year when I actually received (became the owner) the real estate and cash, which was in January 2022. The relative died in December 2021, but legally I still couldn't do anything with the property.
In my old country there is a similar informative form which I have to file to avoid inheritance taxation. I have six months to file it from the day of receiving the property. There are two dates on that form, the first is "date of death" (in my case December 2021which is called "date of receiving") and second date which is January 2022, that date it's called "date when requirement to file the form starts" and I have six months to file the form from that day.
For US tax purposes, the date of constructive receipt seems to have been in 2022. You may have been a technical owner of the property and the cash in 2021, but you didn’t have any ownership that you could act upon until 2022.
I’m not aware that the IRS would penalize you for filing the form in 2021, since it’s a close call. On the other hand, I don’t see the urgency either.
Thank you @Opus 17 for you response. I have couple more short questions:
1. Do I have to mail all 6 pages or only page 1 and 6. I'll be filing only Part IV?
2. Should I check box "initial return"?
3. I received percentage of real estate (3/8 of a house), should I include this info in the "Description of property received"?
4. In the part IV (a) "Date of gift or bequest", should I write date of death (December 2021) or legal receiving (January 2021)? I guess this would affect the year for which I should file the form. I'm not sure if in the US date of death is also considered date of receiving the inheritance or not.
Thanks,
1. The instructions say to mail the entire form.
2. This is a final return since it reflects the final disbursements of the estate.
3. Yes, I would include that detail.
4. I would use the date of death if you choose to file for 2021, and the date of receiving if you choose to file for 2022, to avoid any confusion at the IRS side.
As both @pk and I have mentioned, the doctrine of constructive receipt allows a reasonable argument that you did not receive the funds and property until they were actually transferred to you, even though the law also provides that the value of the property is determined on the date of death. However, if you prefer to file for 2021, I don't think the IRS will find fault. You are not reporting and paying a tax obligation, this is a reporting requirement that is put in place for other reasons.
https://www.irs.gov/forms-pubs/about-form-3520
The constructive receipt of income doctrine has long been a part of the income tax laws. Under this doctrine, a taxpayer will be subject to tax upon an item of income if he has an unrestricted right to determine when such an item of income should be paid. This principle was expressed in a 1930 Supreme Court case, Corliss v. Bowers, 281 U.S. 376 (1930), in a statement by Justice Holmes, that "Income that is subject to a man’s unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not."
The doctrine is embodied in section 1.451-1(a) of the Income Tax Regulations, which states that an item of income (for example compensation for services) is includible in gross income for the taxable year in which it is actually or constructively received. Section 1.451-2(a) of the regulations states that income is constructively received in the year in which, although not actually received, it was made available so that the taxpayer could actually receive it at any time if notice of intention to receive it has been given. However, income is not constructively received if the taxpayer’s control over its receipt is subject to substantial limitations or restrictions.
Thank you @Opus 17 for your help.
I'll file this form in 2023 for 2022, the only problem could be the cost of basis which if i understand correctly should be calculated on the day of death not when I receive the gift, so this might affect the actual value of the property and capital gains tax when i decide to sell it. I know one month shouldn't be a problem, but exchange rates can change rather quickly now. I hope I'm not overthinking this.
@ParkNYC following up from @Opus 17 response and your question about basis of the asset(s) received during distribution to the inheritors:
1. There are often two points in time when the basis is determined/valid ---- (a) at the time of demise of the decedent which is generally construed in practice to mean as soon as possible OR (b) alternate valuation date which in practice is the date on which the trustee / executor / probate judge can get a valid valuation of the all the assets - often within a few months ( 90 days is often followed). The constructive receipt date is when the distributing person ( trustee / executor/ probate judge etc. ) declares the new owner of the asset.
2. If the distributing authority just gets a reasonable estimate of the valuation from a reliable source retrospectively ( which sometimes happens ), that valuation will generally stand for purposes of establishinmg the basis of the property transferred.
3. For US purposes if the valuation is done in one tax year and actual distribution occurs in the next tax year, the original valuation with then then exchange rate is still your basis in US dollars. Also for US tax purposes, the gain at disposition is the sales proceeds ( sales price less any allowable sales costs ) LESS your adjusted basis ( original basis LESS any allowable depreciation PLUS any improvements costs ). Note that all these figures , are based on local currency to US$ exchange rates on "dollar of the day" basis. There are alternatives to this but this is generally true.
Given all of the above, I am not quite sure of your question -- what are you getting at? Please tell me more and either @Opus 17 or I would clarify.
pk
Thank you @pk for clarification, I was concern about calculating the basis and fast changing currency exchange rates. For example if i calculate the basis on the day of death and in late January, there is a 5% difference in property value because of the FX exchange rate change. So for example, if the property is valued in US dollars $100,000 on December 20th (day of death) it will change and it's valued $105,000 on January 20th (date of receiving the gift). This can change more drastically if the property value is much higher that $100,000.
Also, do foreign gifts and inheritances can still qualify for a step-up basis?
Thanks,
Yes, you will report the property also in form 3520 Part IV. Enter a brief description of the property and fair market value of the property.
You will file the 3520 for the tax year 2022 since you actually received the gifts in 2022.
@ParkNYC wrote:
Thank you @pk for clarification, I was concern about calculating the basis and fast changing currency exchange rates. For example if i calculate the basis on the day of death and in late January, there is a 5% difference in property value because of the FX exchange rate change. So for example, if the property is valued in US dollars $100,000 on December 20th (day of death) it will change and it's valued $105,000 on January 20th (date of receiving the gift). This can change more drastically if the property value is much higher that $100,000.
Also, do foreign gifts and inheritances can still qualify for a step-up basis?
Thanks,
The value of the bequest is the value as of the date of the previous owner's death in US$ on that day, or the value in US$ on the alternative date of valuation. I don't think the alternative date of valuation applies here, because we aren't talking about hard to value assets. It should be pretty easy to determine the value of real estate (3/8 share of a house, I think?).
To give some context: Some assets are illiquid (not easily sold or traded) and it may be difficult to determine their value right away. Such as a privately held business, or certain complex investments that aren't listed on a public market, or certain collectibles, or the future value of royalties. It may take the executor some time to unwind complex financial relationships and actually determine the value of certain property. That does not seem to be the case here.
Regardless of the date that you report the bequest (date of death or date of constructive receipt), the value you will report is the value in US$ on the date of the person's death. The regulation that determines value is independent of the reporting requirement.
Yes, you get a stepped-up basis in inherited property. If you are a US taxpayer, US tax laws apply to you no matter where the property is located. If local laws are different, you may pay a different amount of local income tax when you sell the property, but you can claim a tax credit for foreign taxes paid when you report the sale and pay the US tax on your US tax return.
@ParkNYC , while I find @Opus 17 reply to you very complete, correct and to the point, I have to disagree on a minor point -- stepped up basis
(a) it is the decedent's estate that gets the stepped up/ down basis -- he/she had a basis in the property and therefore the basis adjustment to FMV is applied to his/her assets before or at the time of transfer to the estate ( the estate comes into being at the time of the demise of the decedent). Thus the adjustment to his/her basis is available to the estate and before transfer to the inheritors. So in a sense the inheritors get the advantage of the basis adjustment.
(b) Since the inheritor had no basis in the property -- unless co-owned ( which is whole another kettle of fish ), basis adjustment cannot apply.
Another point that concerns me here -- you keep talking about gift. A gift can only occur while the donor is alive -- it become an inheritance , even if the decedent wrote in his will -- "I gift this asset to XXXX", it is still an inheritance if affected after the death of the decedent. I recognize that the form 3550 does cover both gifts and inheritances --- these are not taxable items but IRS wants to establish & track the basis , especially from foreign persons to a US person.
Is there more I can do for you ?
If the estate receives a stepped-up basis, it's still passed to the beneficiaries. It's a technicality that does not change the taxpayer's eventual capital gains calculation if and when they sell their share of the property.
Hi, i am italian and american citizen and so was my father who passed away last year and left me a home over in italy. In my case do i have to fill out form 3520? Thanks in advance!
If your father was a US person for tax purposes, then form 3520 is not required. A "US person" for income tax purposes is a citizen, a green card holder, or a non-citizen living in the US for more than 183 days per year.
@Capitano123 , while generally agreeing with @Opus 17 about your inheritance from your father ( both being US citizens/ US persons for tax purposes ), I would like to point out that , if the property in question is foreign i.e. the estate was a foreign estate under foreign probate laws, then for US tax purposes, you still have to treat this as if the inheritance/gift is from a foreign person/foreign trust/estate and hence form 3520 reporting would be required ( iff, the amount is >= us$100,000). The is because US probate has no jurisdiction over a foreign estate ( this is sometime circumvented through special court orders ( through US State Department ) and requests to the foreign country judicial system , but these are extremely time consuming and therefore most people with foreign assets , just create a local trust / estate and a foreign estate/trust ---- this is quite common as I understand between US and Mexico.
Does this make sense ?
Thank you for that clarification, I did not know that. The estate may be foreign even if the person was a US person. (Once a person dies, their estate comes into existence, and it is technically a different legal entity from the person.)
@pk wrote:
(d) FBAR filing is separate from the return and is due by June 15 the following and done as on line filing at FinCen.gov for form 114 -- this will take you to bsa-efiling site which operates the facility.
The current filing deadline for the FBAR/114 is not June 15 but rather April 15 with an automatic extension until October 15. There is no requirement to file for the extension it is automatic.
https://www.fincen.gov/sites/default/files/shared/FBAR_Due_Date_20190306.pdf
Note the Act referred to says "April 15" not the 1040 due date, which could be June 15 if you are not in the US.
https://www.congress.gov/bill/114th-congress/house-bill/3236/text
Just a small point on the "alternate valuation date" concept. I suggest being a bit careful with the terminology. This is a statutorily defined term of art for US estate taxes. It is not just a date after the date of death. It is exactly six months after the date of death and can only be used if the valuation is less than the date of death value so that excess estate taxes will be paid if the market has moved down in those six months. Estate tax is generally not very relevant (currently) unless there are millions of dollars involved (and the decedent was a US-person or the property US property).
For valuation for income-tax purposes, there may well be a different valuation date based on constructive receipt or something else relating to estate administration or probate, but the alternative valuation date has a specific estate-tax meaning.
https://www.law.cornell.edu/uscode/text/26/2032
I feel a bit uncomfortable with using the income tax concept of constructive receipt for what is fundamentally a transfer/estate/gift tax issue.
Do you have any authority showing an application of Treas. Reg. 1.451-2 - https://www.law.cornell.edu/cfr/text/26/1.451-2 - or similar to an inheritance of a asset?
I would think the issue is more akin to the completed gift doctrine of estate/gift taxation. I.e. The transfer is not "complete" until the donor no longer has dominion and control. Also, it is law school 101 that a completed gift requires "delivery" to the donee. So its quite possible that delivery of foreign real estate doesn't magically happen on the date of death. Though exactly that can happen in some US states.
In some states, the estate owns the real estate (assuming no non-probate transfer mechanism) and the estate will later deed the real estate to the inheritor. In others the inheritor owns the real estate as of the date of death subject to a right of the estate to get it back if needed to settle estate debts. This matters a lot for who has to pay real estate taxes and other carrying costs during the estate administration.
I feel a bit uncomfortable with using the income tax concept of constructive receipt for what is fundamentally a transfer/estate/gift tax issue.
Do you have any authority showing an application of Treas. Reg. 1.451-2 - https://www.law.cornell.edu/cfr/text/26/1.451-2 - or similar to an inheritance of a asset?
I would think the issue is more akin to the completed gift doctrine of estate/gift taxation. I.e. The transfer is not "complete" until the donor no longer has dominion and control. Also, it is law school 101 that a completed gift requires "delivery" to the donee. So its quite possible that delivery of foreign real estate doesn't magically happen on the date of death. Though exactly that can happen in some US states.
In some states, the estate owns the real estate (assuming no non-probate transfer mechanism) and the estate will later deed the real estate to the inheritor. In others the inheritor owns the real estate as of the date of death subject to a right of the estate to get it back if needed to settle estate debts. This matters a lot for who has to pay real estate taxes and other carrying costs during the estate administration.
This may not be worth a lot of consideration for modest amounts. I doubt there is a lot of scrutiny being given to inheritances of real estate around $100k that will be sold with very little gain or loss because of 1041 step-up https://www.law.cornell.edu/uscode/text/26/1014
You seem to be responding to the original taxpayer from 2 months ago.
I don't understand your concern. Under my suggestion that the taxpayer use constructive receipt, the property was received when probate was complete (Jan 2022). Under your argument, property was received when probate was complete (Jan 2022). What's the problem?
As far as I am concerned, US law says the heir receives the stepped up value as of the date of the previous owner's death, in US$ for that day if the property is overseas.
The value and the date are two different concepts. The date in this case determines in which year the 3520 must be filed (since the date of death and the date the transfer was completed occurred in 2 different US tax years. (And in fact, I don't think it makes a material difference in which year the form is filed and I don't think the IRS will really care.) I think the value should be based on the date of death, even if the completion of probate occurs later.
(Consider this situation. John Smith is a rich man with many complicated assets. When he dies, it takes years to settle the estate to the point where the heirs are free to start selling assets and realizing the cash. Many assets have appreciated in that time. Which value will the IRS assess capital gains on, the value on the date of his death, or the value when probate was finally cleared?)
@Opus 17 wrote:
I don't understand your concern. Under my suggestion that the taxpayer use constructive receipt, the property was received when probate was complete (Jan 2022). Under your argument, property was received when probate was complete (Jan 2022). What's the problem?
My concern was not with the outcome but with whether constructive receipt applies in this context. Other people may be reading this post in the future and might rely on it with a different set of facts. I was asking you for why you thought constructive receipt (and income tax regulation) applied in the context of an estate/gift/inheritance issue. It isn't clear to me that it applies and I can't find authority for it. So I was asking for clarification.
@jtax wrote:
....It isn't clear to me that it applies and I can't find authority for it.
Constructive receipt is an accounting term (used primarily for receipt of income - for income tax purposes) and has no applicability to the facts initially set forth in this thread.