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

[Opus 17]

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.  

[pk]

@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 ?  

[Opus 17]

@pk 

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.)

[jtax]

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@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

https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-a....

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

[jtax]

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.ellenbecker.com/resource-center/estate/estate-building-block-understanding-the-alternate...

https://www.law.cornell.edu/uscode/text/26/2032

[jtax]

@Opus 17 @pk 

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.

[jtax]

@Opus 17 @pk 

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

[Opus 17]

@jtax 

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?)

[jtax]

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@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.

[Anonymous_]

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@jtax wrote:
....It isn't clear to me that it applies and I can't find authority for it.

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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.

[pk]

@Opus 17 , @jtax , @Anonymous_   just my two cents:

1. we are here discussing  esoteric / nuanced  concepts that  while germane  to the topic, does nothing to help the  user in solving his/her issues --IMHO

2. the concepts  (and use) of  constructive and actual  receipt / ownership  may or may not be applicable to foreign  tax situations -- e.g.  there is no equivalent of trust  in general  in Mexican law ( Fideocommiso  is a very narrowly  applied equivalent )

3. One  must be aware that while  the transfer of assets to the inheritor(s) of physical asset  and the valuation  thereof  have to follow IRS rules in the USA, same may or may not be true  for situations in another country --e.g.  mexican probate  will do its own valuation of physical asset before distribution and will totally ignore any other valuation.  Courts in India will apply indexing to the basis  based on  govt. inflation indices and not use independent valuation.  

4. @Opus 17  was only trying ( i think ) to point out that there may be difference  on the date when the donee/beneficiary  is the owner vs. when  all the paperwork is registered and finalized.  In the USA the closing day is the transfer date  and registration of the deed is just a formality ( usually within a few days ).

I hope I have poured enough oil on this issue 

pk

[Anonymous_]

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@pk wrote:

I hope I have poured enough oil on this issue 

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@pk I generally agree (actually agree completely) with the points made in your post (particularly, the above-quoted passage).

However, I agree with @jtax with respect to the point that certain terms are far too often thrown around on this board that have a specific legal meaning (e.g., alternate valuation date, as @jtax stated earlier) and that really should be corrected. 

[jtax]

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@pk wrote:

4. @Opus 17  was only trying ( i think ) to point out that there may be difference  on the date when the donee/beneficiary  is the owner vs. when  all the paperwork is registered and finalized.  In the USA the closing day is the transfer date  and registration of the deed is just a formality ( usually within a few days ).

I know this has all gone on too long, but one more comment. The registration of the deed is not just a formality. Ownership changes with the execution of the dead. But as they teach in 1L Property law, the new owner's interest will fail if someone else purchases the same interest from the seller without knowledge of the first sale (a "bona-fide purchaser for value"). And people do indeed sell the same property more than once. By registering the deed, notice is given of the sale and knowledge will be imputed to any subsequent purchaser because they should check the registry. 

A bona-fide purchaser for value receives a good title. The first purchaser does not actually own the property. What they have is a tort-claim or breech-of-contract claim against the seller.

https://en.wikipedia.org/wiki/Bona_fide_purchaser

[ParkNYC]

@pkand @Opus 17 thank you both for your time, I have a follow up questions, I don't want to start a new topic and I know you'd know the answers:

I need some help regarding depreciation of my rental property, cost basis and the recapture tax.

As you know I own a foreign real estate property - 100% in a two family house. It wasn’t legally divided between the co owners, so that’s why I’m saying 50%. In Europe some properties can be owned like that, for example ¼ in a two family house, 1/32 in a 10 family house, etc.

I purchased 50% (one apartment and 50% of the land) in November 2021 and I inherited another 50% after my mother passed away in January 2022.

 I started renting both apartments, one in January 2022 (my mother’s) and second one (which I purchased in November) in March 2022.

My questions are:

1. How do I calculate cost of basis, do I have to calculate them separately (2 apartments) or as a whole (I own 100%)?
2. Can I add lawyer’s fee, court fees, taxes and other expenses, which occurred during transactions and I paid, to the cost of basis?
3. Can one property I inherited be valued higher than one I purchased, even if it’s a part of the same real estate? The inherited apartment was in better shape.
4. Can I depreciate both properties (even inherited) or the only one I purchased?
5. Can I choose not to depreciate inherited property and would you discourage that?
6. What happens if I stopped renting my property for a few months or longer, can I still depreciate and deduct this as an expense during tax year?
7. What happens to depreciation when I stop renting either of my properties and there will be no rental income?
8. If I understand correctly I’d have to depreciate them for 30 years.

Thank you again,

ParkNYC

[sri_97]

I have one question. I just mailed it for 2022 because I received an apartment in 2022. Reading thru this topic I realized I put:

1) Initial return

2) and in PART IV, 54 I simply put "residential property". Did not put any address. 

So it looks like I need to file an amended return. I do have till the 15th of April to file the amended 3520.