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Rk99
Level 2

Sale of Home in Italy as a US Citizen and resident

Hello Everyone. 

I am a dual Italian/US Citizen and live in the US full time. My mother is in the process of executing a transfer of her properties to me and my siblings without us having to pay her, although I am not sure this would be considered like a typical donation from a legal standpoint. Immediately after receiving this property, an apartment with garage, my sibling would like to buy it from me at a fair value. I would get all that money in one transaction, and plan on having it all transferred to my US bank account. Since I have not lived, nor will I want to live in that apartment in the future, I understand I will not be able to avoid capital gains taxes, which is fine with me. I'm assuming the Italian government will take some taxes out of that amount, and might be able to get a foreign tax credit or deduction. I am in one of the lowest tax brackets, and wondering what I should expect to pay percentage-wise in capital gains, as well as other potential taxes. By selling this property immediately after the "donation" from my mother, my sibling would pay all legal and notary fees, which tend to be quite high in Italy, so that might be an advantage over holding on to the property longer and NOT living in it, nor renting it out to anyone. Your advice would be much appreciated. 

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8 Replies

Sale of Home in Italy as a US Citizen and resident

This is a GIFT not a donation ... and your basis in the sale is the donor's basis and you get their holding period as well. 

 

If you sell the apt for more than the basis you have a capital gain.  Foreign taxes paid on the sale may be a deduction or credit on the US return. 

Rk99
Level 2

Sale of Home in Italy as a US Citizen and resident

Thank you so much for your reply. It clarifies things a lot!

jtax
Level 10

Sale of Home in Italy as a US Citizen and resident

@Critter is right. In terms of how much you'll pay this article explains the complex capital gains rates. It depends upon your gain and your other income.

 

https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/

 

When @Critter says you will get the donor's basis and holding period this is what is meant. Your income from the sale of any capital asset (which this is) is the proceeds (money you get from the sale) minus your basis.  Your basis starts as the price you paid for the property but you all add in any improvements made to the property (e.g. renovations, adding a room, etc.).

 

For a gift where your sale results in a gain, your basis is your mother's basis. So you need to get that info from her including whatever paperwork you can get. 

The holding period is important also. More than 1 year and you get the really good long-term rates. That probably applies to you unless your mother recently bought that apartment.

 

Question: did your mother own the apartment with your father? If so is he still living? If not you might get a partial step-up in basis to its fair-market value for his half of the apartment as of his death. You'd have to make sure that applies to non-US citizens or properties. I'm not sure.

 

If there are Italian taxes that are part of the sale that you pay those reduce your gain. If there are taxes on the gain itself charged by Italy those may result in a credit for you on US tax. That could wipe out any US tax because US taxes are generally much lower. But it is complicated and doesn't always work out like that. Not carefully the different taxes. The credit against your INCOME tax only applies to foreign taxes based on your INCOME.

There are many posts in this form about selling foreign real estate. They may be helpful to you. See, for example, https://ttlc.intuit.com/community/tax-credits-deductions/discussion/taxes-on-foreign-home-sales/00/5...

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Rk99
Level 2

Sale of Home in Italy as a US Citizen and resident

Wow! @jtax This is such a thorough answer. Thank you! My father bought the land in the 60s, then had this house built in the early 70s, and my mother has lived there since, so that should be good as far as the capital gains rates you mentioned. So it sounds like I don't have to personally own it for over 1 year to benefit from lower capital gain taxes, as long as she has owned it and lived in it for at least that long, which helps! My dad passed away over 20 years ago and my mom, sibling and I all inherited it (as well as other properties) at that time. My mom inherited 50% and all us 4 kids have the other 50% as 12.5% each, so I guess I've technically owned that 12.5% of that property for a long time, but not all of it.  It's a pretty complex situation and we have an expert in Italy working on it too, and after this "redistribution", sort of exchanging of quotes with my siblings, all I will get of all properties originally inherited from my dad is just the apartment my mom will be gifting me (which is one of a 3 story house). As far as knowing how much that portion of the house cost to build and renovate over the years it might be a bit challenging, as I am not quite sure that some of the original documentation even exists anymore. 

jtax
Level 10

Sale of Home in Italy as a US Citizen and resident

@Rk99 Glad to help.

 

Hmm... I'm confused. Do you own 12.5% of the apartment? Or 12.5% of some land, a house, and the apartment? For the rest I will assume that we are only talking about the apartment and that your mom owns 50% of it and 12.5% x 4 for the kids.

 

A couple of things.

 

Right now you own 12.5% of the property. Your holding period (for > 1 yr capital gain) started when you inherited it. Your basis actually appears to be its fair-market value as of that date. I say appears to be because it is somewhat surprising that it applies if your Dad wasn't a US citizen or resident. But it appears to. Please review this for more info https://hodgen.com/basis-step-up-on-assets-inherited-from-nonresident/

 

You mother will be gifting you (as I understand) another 12.5%. So you will own a total of 25%. Your basis in the gifted 12.5% from you mom is her basis. (You are right that your gain is long term is she owned it for > 1 yr. Living it in does not matter at all here.)

 

So you are not selling the apartment. You are selling 25% of the apartment. That is what I would put down in TT next year. (E.g. "25% of apartment, 1 main st, town, state, county")

 

Your total basis is therefore the 12.5% of the fair-market value of the property when you inherited it plus your mother's basis in the second 12.5% that she is giving you. 

 

Her basis in her 50% of the apartment is 50% of what she and your father bought the property for plus any improvements. 

 

Let's say the property was worth $100k when your father died and that your parents total cost for the apartment was $40k. Then your inherited 12.5% basis would be $12.5k. Your mom's 50% basis would be $20k. Therefore your total basis would be $12.5k + $20k / 4 = $17.5k.

 

As you say getting the records maybe difficult. In the US I would suggest pulling the recorded deed to see the price paid. In any case the burden of proof is on you. The IRS will be quite happy if you say the basis is zero. That might not be far off for a 50 year old property. So it may not be worth worrying about.

 

Similarly you need some sort of appraisal or tax document or something to establish the fair-market value when you inherited your $12.5k. Again it might not matter if you low ball it if you are either in a low tax bracket, the gain isn't much (there is a zero % LTCG bracket for some). Or if the  Italian capital gain tax is more than the US tax and the foreign tax credit magic works for you to offset the US tax. The latter is likely, but not certain.

 

Also note that you need to convert to US dollars. This describes how to do that. If there are only a few dates involved you should use the exchange rate on those dates. If there are many, you can use the average annual exchange rate.

 

https://www.irs.gov/individuals/international-taxpayers/foreign-currency-and-currency-exchange-rates

 

 

 

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Rk99
Level 2

Sale of Home in Italy as a US Citizen and resident

@jtax  Another amazing answer! 🙂 Thank you so much! This is confusing to me as well, and sorry if I didn't explain as clearly as I should have, but it's quite convoluted, as the lawyer who helped him with his will, couldn't have chosen a more complicated process! When my dad died, my mom inherited  50% and us 4 kids got 12.5% each of several properties/possessions he left to us all. If understand that correctly, what this (different than my dad's) Italian lawyer will do some sort of "redistribution of those quotes" as follows: My mom will give me her full 50% of the apartment as a gift and my 3 siblings will each renounce their 12.5%, so that I will end up owning 100% of the apartment. In turn I will renounce my 12.5% on all other properties that will be gifted by my mom to my siblings, so that each of us 4 will get full ownership of 1 property. So in the end I will have full ownership of the apartment (but nothing else that I had originally inherited from my father anymore). My sister will then buy the apartment from me, and I will sell it to her at fair market value without realtors involved. And she will have to pay me for 100% of it, because she will have given up her previously owned 12.5% in the "redistribution" process. As you suggested for an older property that might not have a lot of value, my lower income, and because of the lack of documentation, I might end up using a basis of 0, as I don't expect to have to pay much in capital gains anyway. You have been beyond helpful, and I truly appreciate it! 

jtax
Level 10

Sale of Home in Italy as a US Citizen and resident

Hmm... this makes my head hurt. I think you need to understand if the swapping of interests in the various properties represents a taxable US sale or exchange. It doesn't matter if you don't get cash. If you exchange a property interest for another piece of property US tax law usually treats you as having sold it for the fair-market value of the property received.

 

Also in the US you can only disclaim an inheritance w/in 9 months. So if a "renunciation" is similar to a US disclaimer, I'm not sure that works.

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Rk99
Level 2

Sale of Home in Italy as a US Citizen and resident

@jtax I can see how this would make your head hurt! It certainly makes mine spin. I will need to speak to the Italian lawyer to understand if I got that right, or if perhaps things are being done differently, and hopefully he'll be able to help clarify what the situation would be here in the US too. Thank you SO much! 

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