Foreign inheritance / gift questions

[lameri]

I have questions regarding receiving a gift from an individual abroad (all referring to both the federal and the state level):

1. If you receive money:
1. Do you need to report it? With what form? (I believe it is with Form 3520 if greater than $100K.)
2. Is that money taxable? (I believe it isn't.)
3. Is there any difference between gift and inheritance?
2. If you inherit land:
1. Do you need to report it? With what form? (Form 3520 if greater than $100K again?)
2. Is that money taxable? (I believe it isn't.)
3. If you paid "inheritance tax", can you deduct in any way in your tax return?
3. If you sell the land inherited:
1. Do you need to report it? With what form? (1040, sch D?)
2. Is that money taxable? (I believe it is.)
3. Is the stepped-up basis counted on the date of death or on the date of transfer of ownership? (I believe in the US it is always automatic, so the stepped up basis is from the date of death, but there are more complicated cases where the transfer may be done in several steps, and therefore the transfer happens many months later. Would that move the basis to that date?)

Thank you!

[JulieS]

Yes, if you receive a gift worth $100,000 or more from a foreign person, you have to report it by filing Form 3520. 

The receipt of cash as a gift or inheritance is not taxable.

If you inherited land worth $100,000 or more from a foreign person, you have to report it by filing Form 3520.

The receipt of the land is not taxable.

Inheritance taxes are only deductible on an estate tax return, so that would not apply. 

You have to report the sale of the land in the year the sale occurs. It is reported on Form 8949 and Schedule D. If you have a gain, the gain is taxable, but it is a long term capital gain, so it has a lower tax rate. 

You get a stepped up basis on foreign inherited assets. The basis is the value on the date of death, (or an alternate valuation date if elected by the executor). 

The alternate valuation date only applies if a US Estate Tax Return is required, so that may not apply to this case. 

The delay in transferring the assets does not change the basis. 

[lameri]

Thank you very much for your answers. Now, more specifically:

Decedent had 3 other siblings. He dies year X without a will. His own parents' estate hasn't been distributed because decedent is in dispute with one sibling. When he dies, the other 3 siblings reach an agreement and divide equally the land from their parents' estate. Decedent has one child (alive) and one grandson (from a deceased child)  who, according to local estate law, will each get 1/8 of the decedent's grandparents estate. However, it isn't until the end of year X+2 that both of the decedent's heirs get to know that the estate has been resolved in their favor. How can they reconcile the fact that they can no longer make the reporting on year X? Also, in the local country, appraisal is done by the government once a year whenever they want (there is no such thing as "date of death valuation"), would the value on year X be good enough?

[RobertB4444]

Ok, @lameri, you asked two very distinct questions and I'm going to deal with them in reverse order.

The valuation for year X is just fine.  Satisfies the requirement nicely.

The second question is more complicated.  If the land was sold and then the proceeds were distributed to the heirs (one eighth, as you say) then the heirs had nothing to do with the sale of the land.  They received an inheritance of cash and if it is over $100,000 and they are US residents or citizens they will report it on form 3520.  The sale of the land does not enter into consideration because only cash was received by the heirs.  No taxable event has occurred.

If they received a piece of the land (again, one eighth) then, like @JulieS says above, no taxable event occurs when they get the land, only when they sell it.  And if they didn't find out until X+2 that they had received the property then they actually got it in X+2 (The basis is still the valuation from X, though).  So the 3520 is due in X+2, not X.  

[lameri]

Thank you, everyone.

@JulieS : Regarding your comment: "Inheritance taxes are only deductible on an estate tax return, so that would not apply. " Does it mean that the person who filed the tax (the child who is alive) for the decedent could have deducted the money? Because, in the end, both heirs (child and grandchild) covered those inheritance taxes.

[ErnieS0]

No. The child could not have deducted any inheritance tax. Inheritance taxes are deducted on Form 706, the US estate tax return.

[lameri]

@RobertB4444 Due to the secrecy of the bureaucracy, it is unclear whether the land was sold before or after the ownership transferred from the siblings' estate to the two heirs. 

From what you say:

* If the sale happened before the transfer (in sum, they never inherited land), then only a report of the cash gift would be needed. In that case, what happens to the tax deducted from the proceeds of the sale in the foreign country? Can the heirs deduct it from their tax return here (with some "foreign tax credit" or something)?

* If the sale happened after the transfer, then a capital gain/loss would apply and would need to be reported year X+2 but with a basis of year X, like you said. So basically, two appraisals would be needed for years X and X+2. Likewise, if the local government deducts tax from the sale proceeds, how can that be accounted for so that the heirs are not doubly taxed (abroad and in the US)?

Thank you.

[lameri]

@ErnieS0 Sorry I didn't make myself clear: Both the child and the grandchild paid "inheritance tax" to the foreign country for it to process the inheritance (that happened year X+1). Additionally, the child filed an estate return for decedent's estate. Is there any way for them to recover/deduct the money both child and grandchild paid as "inheritance tax" to the foreign government? Or is that "lost money" as far as US taxation is concerned? Should the child have reported it in the "estate tax return" (Form 706) that you mention? Since the decedent was no longer living in the US and had no interests here, the child reported just 0.

Thank you.

[RobertB4444]

@lameri  These two people are only reporting the money that they received.  They are not paying taxes on it here.  So there is no tax deduction since there are no taxes.

If the two recipients only received cash and didn't receive a title to the land then they never received the land.  They didn't have control over it - they didn't have it.  They just report the money that they received - AFTER the foreign taxes were taken out - on form 3520.

There are no credits for the inheritance taxes paid either.  

[lameri]

@RobertB4444 (I somehow missed your response.)

The thing is: they did pay taxes, not here, but there, as "inheritance tax." The foreign government needed that money from them as heirs to keep processing the transfer of ownership. And since from an earlier expert here I heard that this money would only need to be reported in the "estate return," I wonder how the heirs could somehow deduct it?

[RobertB4444]

@lameri  They can't deduct the taxes paid unless they also report the income that they received.  

The reason that someone gets a tax deduction for foreign taxes paid is because it is unfair to be taxed twice on the same income.  Since they are not reporting the income they can not deduct the taxes.  

So, as I said above, there is no credit for the inheritance taxes paid.  

[lameri]

@RobertB4444  The plan to report it, but the thing is they haven't got the money yet. Here's the timeline:

Year X: Decedent dies. 

Year X+1: Two heirs pay inheritance tax.

Year X+2: One of the heirs files estate tax (although they haven't yet received any money because the inheritance matters is still going on in the foreign country via power of attorney).

From reading the answers on this thread, the inheritance tax needs to go on the estate tax return (form 706) but the heirs, like I said, didn't include it there because, as you said, they couldn't offset the money they hadn't yet got, so they wrote a 0 to everything (since the decedent no longer owned anything in the US. Should they file an amended estate return once they receive the money? Would it be OK to add there the inheritance money that they paid (year X+1) even if it was years before? If they are lucky, the inheritance transfer will complete during year X+3.

Thank you!

[RobertB4444]

@lameri  There is no tax due on cash received by heirs of an estate.  They do not need to report this inheritance tax.  They only need to use form 3520 to report that they got the money.  

There is no tax return due from someone who - in a foreign country! - receives cash for the sale of land that they never had control over.  The estate that sold the land may have a return requirement.  But if they do it will be a requirement in that foreign country, not in the US.  The two people you have referenced in this thread do not have to file any tax return for this estate or for the sale of this foreign property.  They only need to report that they have received funds.  They will report the money only after they receive it and they will only report what they actually receive on form 3520.  No taxes will be due.

There is no tax return due on the inheritance that these two people have received.  

[lameri]

@RobertB4444 Thanks, Robert. So basically, that money they paid is "lost money"? I am not sure what "inheritance tax" means really, but it seems it is money that they will never be compensated for, correct?

On your other point: so it was a mistake that one of the heirs filed Form 706? As I said, it had a 0 total, but I guess it wasn't needed? I hope that is not a problem. The heir was told that she needed to do it, but hearing you it seems that it wasn't needed.

Additionally,

1) Would Form 706 be needed if the inheritance title transfer were to occur before liquidating the asset (land)?

2) What situation is ultimately more beneficial, to inherit money (sale happening before the inheritance transfer) or to inherit land (sale happening after the inheritance transfer)? I ask because there is a second parcel that the 3 siblings of the decedent are trying to sell.

[2001rg]

When is foreign real estate from a foreign decedent's last will reported on form 3520 for the American beneficiary:

1) in the year of decedent's death 2020

or

2) in the year probate is completed and the real estate is transferred to the American beneficiary's title 2022?