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

[friendassistance]

hello,

I have confusion about when an inheritor can truly sell an inherited real estate and when to file form 3520.

My father died in 2023 and we started probate (succession) paying inheritance taxes in 2023, about 7 months after is death.Ineritance was real estate parts (other parts I already owned since mom died) and cash. I did not file form 3520 believing it was just the cash. And the cash was not given to me from the bank before 2024. So I was expecting to file 3520 in 2024. Meanwhile I decided to sell some of the real estate, and it was not possible before I did the transcription of the inheritance acceptance. Only then we could sell. So we got that transcription the same day we sold the property. In 2024. So tecnically I could not sell the property in 2023. Because there was not transcription of the acceptance of inheritance. Which in my country of origin is necessary to guarantee the buyer that I actually really inherited that asset and not just apparently. So would this fact make the reporting time pertain the year 2024? so basically filing form 3520 for both real estate and cash in 2025?

[jtax]

First, I am very sorry for your the loss of your father and your mother.

I am not sure your analysis is correct. This topic is very complex with potentially (but perhaps not likely???) large penalties involved. Too complex for a clear answer on an Internet forum. I strongly suggest that you find a tax attorney, CPA, or enrolled agent who regularly deals with form 3520.

Look carefully at the instruction section "Who Must File" in https://www.irs.gov/pub/irs-pdf/i3520.pdf

It says, in part,

4. You are a U.S. person who, during the current tax year, received either:
     a. More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests;

The important word here, to me, is "received." Without more research I don't see why received refers only to cash. Most US tax law includes property valued at it's fair-market value. So employers can't give you a free car and pretend it's not compensation.

The legal question would be whether or not, in 2023, you owned (had "received") the real estate or not. You could well be considered the owner as soon as your father passed. This would be the case in many US states. Or you might not be the owner until that form was obtained. I doubt anyone here can answer that. 

Note that if you got an extension for your 2023 1040 until October, the 3250 for 2023 would not be due until October. If that's the case, you might want to just file the 3250 for 2023 and be done with it. See "When and Where To File" in the instructions. There are a few more exceptions. Even if late you might want to just file it for 2023 if that is the correct year. But a tax professional who frequently deals with this can advise you on that.

Also, just to avoid any confusion. Your subject says "gift tax."  The US federal tax system does not have a tax on gifts received. See https://www.law.cornell.edu/uscode/text/26/102 ...

But there is a tax on gifts GIVEN (above a very high limit).  This would not apply if your parents were non-(US)resident aliens. I.e. it only would apply if they were US persons (citizens or green card holders). 

The 3520 is not about a gift tax. It is about asset reporting. It is so the US government is on notice that there are foreign assets now owned by a US person and that the US person is therefore more likely to report any income from those assets (rental income, capital gains, dividends, etc.)

[pk]

@friendassistance  having read through your post and generally agreeing with response from my colleague @jtax , I would like to add:

(a) form 3520 ( unless you were the owner  or received assets/ income  from a foreign trust etc. )  section IV is generally limited to   currency equivalent  of US$100,000 or more.  There is generally no tax on it but you have to report  this  for the tax year when you received  the cash equivalent .

(b)  If  you had a  bank account that you owned or had signatory power over  ( nominee )  the that may come under  FBAR (  form 114 at FinCen.gov )  and /or FATCA   regs.

(c)   On the realestate  that you received as beneficiary ----  your basis in the property  ( for US purposes ) is  FMV  on the date pf passing of the decedent.  There is no reporting requirement of real-estate / immovable property till  disposal.  On disposal , you have to recognize the gain ( capital or otherwise )  and  pay the taxes  .

(d) If you are taxed by the foreign taxing authority then  & in concert with any Tax Treaty conditions   (between US and that country), that foreign tax may be eligible  for  US tax credit

(e) The date of your actual  ownership  of the asset is not a tax event and does not play into gain computation.

Is there more one of us can do for you ?

[jtax]

BTW, @friendassistance we are assuming that you are a US citizen or permeant resident. If not let us know. That might change a lot.

As usual @pk adds some very help elaborations. This is all so complicated that it is very helpful to be very clear.

Re: @pk's (b) the FBAR / fincen 114, filing requirement. That is an excellent point. Note the reporting requirements for that are the you have ownership or a certain control of the bank account and that the amount triggering a report is $10k USD equivalent in any foreign bank account at anytime during the year. See https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-a... and https://bsaefiling.fincen.treas.gov/main.html for more information. 

Re: (c) basis of the real estate. Note this is about US income tax (1040) (not gift tax). Income includes the gain from sale of property. Gain is sale price - basis (oversimplified a bit). Basis of inherited property is, as @pk describes, the FMV (fair-market value) of the property as of the date of death. Usually the gain from inherited real estate promptly sold is zero or even a loss (because of the expenses of the sale and because the value won't have changed much from the date of death) https://www.law.cornell.edu/uscode/text/26/1014

Re: (d) tax paid to a foreign country. @pk is talking about income taxes.  The inheritance tax that you paid is not considered for US income tax purposes (form 1040). I don't think you can add it to your basis, but again I think you need a professional to advise you. It might or might not be an offset if you had US estate taxes, maybe based on a treaty. But that wouldn't apply unless your parents were US persons and their estate was very large. It might not apply even then because the foreign tax was an inheritance tax not an estate tax.

Here are two law firms' articles on the subject. I'm sure you can find others with a quick search. They could be a good starting point. Ask how much an hour or two of their time would cost. Could be well worth it. One of them offers a free 30-minute consultation.

https://www.jdkatz.com/a-comprehensive-guide-for-u-s-citizens-inheriting-assets-from-abroad/

https://ceritypartners.com/insights/receiving-an-inheritance-from-abroad-special-considerations-for-...

[friendassistance]

thanks everyone for the answers, I hope to have more clarity on some points:

a) when you speak of owner at the beginning. I owned parts of the properties already before my dad died, I received my part of his own. Does it make any difference to my situation?

I know there is no tax involved. I am not sure how the"gift tax" nomenclature came in to the topic. 

c) so basically when I do form 8949 at the acquired date I would have to put the date of the passing of my dad, for part of the property, and the date of the passing of my mother, for another percentage of the property?

I do not understand the no need of reporting statement, for the real estate. Does it go in the form 3520 or not? because I believed it did not go there in the beginning so I did not file the form in 2023. Although as I said before selling I had to produce a notarized transcribed acceptance of the inheritance to guarantee I was the owner . This was in 2024 and the same day I sold the property to the buyer.

So my biggest concern is.. did I miss the deadline?

I received cash from the bank in 2024. So I was prepared to file the form 3520 for 2024, but I did not understand the possibility to include the real estate. If the document I had to produce to sell the property makes me the guaranteed owner of the property, then I should be fine and just file the form in 2024 with that date. But I cannot use that date then on the form 8949 as acquired date for the capital gain... there was no gain in any case..it was a loss considering both the passing of my mother and of my dad  whatever date I write on the form

 I hope for more clarity, but mainly peace of mind, because it is taking a toll on my health

[friendassistance]

and yes I am US person but my parents were not

[pk]

@friendassistance , before I  answer the questions/ doubts you raised, could you please tell me :

1.   which country are we talking  about i.e. where was the property located ?  Were your parents ( decedents )  both from the same country ?

2.     are you talking about business / income  property  or the residence of your parents ?

3.     did your mother leave  1/2 or some other percentage  of the property to you  and your father left the rest  to you -- is that what we are talking about ?

[friendassistance]

yes my parents were from same country.

together with my sibling I received by the law part of the property when my mother died and then the remaining part always by the law when my dad died. No will involved. Just the law made the division.

You cannot sell any of the properties until you make a notarized acceptance of the inheritance, even if you paid the inheritance taxes before.

For what I know when the parents died we became heir, but this does not mean we accepted the inheritance.

My parents were not living in part of the property we receiived, but there was no income from the properties either and no business

[friendassistance]

I forgot yes we are all born in the same countr, not in the US

[pk]

@friendassistance  what country please 

pk

[friendassistance]

Italy

[friendassistance]

so basically received a part from my mother many years ago and then the other part from my father, all by the law. I got the heir of totally half property at the end of the story. But without notarized acceptance of inheritance, which happened in 2024, I had no power to sell the properties. Without that document I could have been an apparent heir and not a real one. With that documents I documented my acceptance of the property

[pk]

@friendassistance , I have gone back and refreshed my memory about  US-Italy tax treaty.   From rereading your posts and responses from my colleagues , what I get of the situation is as follows:

(1) your parents  acquired  a  real-estate  in the year XXXX for  equivalent  to US$AAAA.  This asset was jointly held and thus  your mother had  50% and your father had 50%  ( if the whole ;prop was US$100,000 then each  had a basis of US$50,000)

(2) Once your mother passed , your share of the asset amounted to US$BBBB , allowing for  FMV step up  of your mother's share of the property and   recognizing  your sibling's shares -- let's call it  US$FMV1. ( Thus  if you had two other siblings and the FMV of the house was US$200,000, then the basis of the property of your share would be  US$100,000--- your mother's share  stepped up  by 1/2 FMV----- divided by three i.e. US$33,,000

(3) when your father passed  again we have a step up of his half .  So if the FMV of the whole property is US300,000 , then his  basis of original US$50,000 gets  step-up to  US150,000. This means each of you siblings' share of this half becomes US$50,000.   Thus your  basis on the total property is now  US$33,000 plus US$50,000 = US$83,000.

(4) Thus when you dispose of the property at FMV --- US$300,000,  each of you three siblings ( for US purposes ) have a gain of US$17,000

Does this make sense ?

Is there more I can do for you ?

pk

[friendassistance]

thank you, yes I understood the calculation on the example

I appreciated everyone that participated in the discussion

[jtax]

I think you should seek professional advice, perhaps starting with the law firm links I provided. If you are very stressed about that I think you need to find someone who can clearly answer your questions. The volunteers in this form are not professionals who deal with the 3520 and these kind of issues all the time. 

In particular I do no know if the 3520 only applies to cash. I said I didn't find anything indicating that, but I don't know. 

You present some details that were not obvious it me before that you owned some of the property before your father's death. I don't understand when or how you obtained that ownership. 

You should pull together all the details the best you can. Write them down. I would include the dates and % ownership that you obtained personal ownership and a description of the property. Let the potential lawyers know this. For example and making things up something like: a single family home in Country A (or rental property or farm or whatever it was). Parents purchased in 1950 for <cost>. They gave me and my sister 10% (5%) each on April 1 2008.  My mother died on March 14, 2022 and [my father inherited her share or her share was split between my sister, my father, and myself]. The property was worth <amount> at that time. My father died  June 1, 2023. I inherited X% of his share. The property was worth <amount> on the day he died. Describe the sale process.

Do not stress about this. Just deal with getting advice from a professional. Maybe you missed the deadline. maybe you didn't. It probably doesn't matter much, but ask the professional.