Sale of foreign property which was given as gift from my father

[MJ154]

In 2023, I sold a condo given to me by my father few years ago. I am US citizen. He was not. I understand that I have to pay capital gains on this sale. I assume I calculate the gains by subtracting the value of the condo when it was given to me from the sale price (minus real estate agent fees). Do I also have to submit form 3520 (foreign gifts and list the sale price)? Since  the income from the sale was deposited first into a foreign bank before being transferred to my us account, I understand I also have to file FinCEN Form 114. What about forms 8949 and 8938? Do I also need to complete these forms? 

[pk]

@MJ154 , the gift of an asset  and the recognition thereof  requires  -- (a) recognition  by filing form 3520  for the year  ( contemporaneously) that the event took place.  So when was this  gifted  / titled in your name?  In which country ?  (b) generally the basis of the property transfers from the  donor to the donee i.e.  if the donor acquired for  US$XXXX and put in improvements  of  US$YYYY then his/her basis would be  US$ZZZZ ( sum of US$XXXX and US$YYYY).  The receiving person's basis  at the time of  donation would be also  US$ZZZZ..

Thus the gain on disposition ( for the donee/recipient) would be based  US$ZZZZ not on FMV at the time of transfer from donor to donee..   Note that in some countries  the Capital gain is based on  an indexed value of the asset -- not so in the US.

If the proceeds rested in a foreign bank account that you own and/or have signature authority over, then both FBAR  ( form 114 at FinCen.gov ) and FATCA ( form 8938 ) would come into effect. 

To make this answer more focused, please consider answering my questions.

[MJ154]

The property was given to me in 2012. I did not know it had to be reported to irs so no forms were filed at that time; The property value was listed in the formal agreement. No improvements were made to the property and it was kept vacant awaiting possibility of my father moving in there. After my father passed last year, I was free to finally sell it. The property was in Poland. I did not have to pay any taxes there, since it was a gift and I kept it long enough to qualify for exemption. 

[MJ154]

Thank you for your response!

[pk · Accepted solution]

@MJ154 ,   I am sorry for your loss.

On the 3520, you can either  file it with a note explaining that  it was an error and  mail it to the address   shown on the form.  TurboTax does not support this form., if the valuation of the asset was above US$100,000.    You can also ignore this  and take the risk that IRS does not check on this   ( this is because when you recognize the disposition of the asset on your 2023 filing , you will need to answer how you acquired the foreign asset). Either way it is risk but I like the first option better.

A point to note is the condition under which  your father gifted you the asset --- if there was stipulation that  you cannot do certain things ( like sell ) till your father has passed  -- in the US this  Life Estate -- then the gift  is constrained  and therefore  not quite  a gift till the passing of the donor.  In such a case I would argue that the  basis should be the FMV at the time of passing ( whether he used  it or not ).

If that is the case you should perhaps consulta tax attorney to be able to homologate   Polish and US laws.

If not , then my earlier statements stand.

Is there more I can do for you ?

BTW -- if this has answered your query, please accept the answer so the thread closes.

[MJ154]

Yes, you answered my question. I really appreciate it. You can close this thread. 

[pk]

I cannot -- only you the poster can accept and/or cheer

Thank you for allowing me to be of help

[MJ154]

I have more specific questions with more specific information regarding firm 8949:

My father (foreign person) gave me (US citizen) gift of condo in Poland in 2012. Appraised value of this condo at that time was ~$142,719. I sold the condo in 2023 for ~$202,197. So, when I completed table in Part 2, I entered the following info:  under column b - I listed 2012 as date acquired. Column c, sold - 2023. Column d, proceeds -202,197. Column e, cost, ir other basis - 142,719? Column h, gain ~$59, 478.

I was told that my calculations above were incorrect and that under US regulations, my profit to be reported on Form 8949 is to be calculated using value of the condo at the time my father bought it. My father bought it in 2005 for $65,790. As far as I know he did not make any improvements to the property, so, my reportable, but, obviously not real „gain” would be $136,407???  I do not understand the logic behind it. 

This property was located in the foreign country. The property was bought and owned for 7 years by Polish citizen in his native country (Poland).   I did not have any rights to the property before  2012. Why would I be required to pay capital gain taxes on the property I did not own? If I did not have any rights to this foreign  property, why would the US government have any rights to this property before it was gifted to me (American citizen) in 2012. I can understand why these regulations would apply in the US or abroad if both giving and receiving persons were US citizens. Under this scenario someone had to pay capital gains for the whole time between 2005 and 2023, but, my father was foreign person and, I am sure, he complied with all Polish tax laws during this time. 

In conclusion, i  just do not understand why would American government collect taxes from me on capital gains accrued in foreign country during years when the property was owned by the foreign citizen? 

One more point: in the instructions for „Column e - cost or other basis” to form 8949, „The basis of property you buy is usually its cost, including the purchase price and any costs of purchase, such as commissions. You may not be able to use the actual cost as the basis if you inherited the property, got it as a gift, or received it in a tax-free exchange or involuntary conversion or in connection with a “wash sale.” If you don't use the actual cost, attach an explanation of your basis.

The basis of property acquired by gift is generally the basis of the property in the hands of the donor.” Does this language opens possibility of using FMV at the time the property was given to US citizen by foreign person? 

Would appreciate hearing your expertise on this topic. 

[pk]

@MJ154 , section 1015 of the Internal Revenue Code clearly  declares the basis  of  a property acquired by gift is the same as the basis of the donor at the time of  transfer.   US tax code  generally  is the same whether a n asset ( specifically immovable )  is located in the US or elsewhere.  Thus  the  rules on the basis ,and adjustments thereof, operate  just as if the asset and taxpayer are domestic.

 The situation not clarified  is what to do  when the asset and the owner did not exist ( for US tax purposes) prior to a date certain --- when the tax payer becomes a US person.  This becomes even more complicated when  the taxpayer ( and before becoming a US person ) has paid  taxes to a foreign  govt.  to recognize  FMV of the asset ( e.g. wealth tax which taxes an asset on the incremental value of the asset i.e. to bring it to FMV for that particular year). 

While these musings  may not help, the onus is on the taxpayer to justify the basis of the asset  ( no matter how acquired) and thereby compute the gain/loss on alienation of the asset ownbership.

Hope this helps.   Is there more I can do for you ?

pk

[Shogun159]

What did you end up doing? Did you report it on 8949 or just ignore it? I'm in the same situation as you

[AmyC]

You do not want to ignore the income. You should report it on your tax return. Form 8949 will go to sch D which goes to the main form 1040.

@Shogun159 

[pk]

@Shogun159 , agreeing with @AmyC ,  do you still need help on this ?  Is this tax year 2023 or 2025 ?

I will circle back once IO hear from you