Inherited overseas property

[mdd108]

I inherited a property overseas.  It was sold January 2022 and the proceeds were transferred by my lawyer to the Revenue Services as I had an inheritance tax bill to pay in the country the property was located.  After direct expenses relating to the sale were paid the house sold for less than the cost price - price at time of inheritance.  Do I need to declare this property on my tax return?   

[DaveF1006]

Yes, should report the sale of this inherited property on your tax return even though it generates a loss. What is important however is you will need to report this inheritance on Form 3520.  In accordance with the instructions for form 3520, you file if you received 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. It also mentions that if you receive a distribution from a foreign trust (any amount), then this distribution needs to be reported in accordance with step 3 of the instructions.

The 3520 is an informational form sent to the IRS that does not generate any tax liability on your return. Also form 3520 will need to be printed and mailed with your tax return as Turbo Tax does not support this form. Here is a download copy of Form 3520 to submit and mail with your return.

Now report your inherited property as an investment property.

1. Go to federal>wages and income>investment income>stocks mutual funds etc
2. Say not to 1099B
3. Enter the sale. Description.  Inherited House
4. Date sold
5. Date acquired.  Date of inheritance.
6. Sales proceeds. Amount received for the sale.
7. Cost or other basis. This is the FMV of the house at the date of the decedent's death.  
8. indicate this is long-term
9. ignore the screens until you arrive at a screen that asks if any of these less common adjustments apply
10. Here you will check that the sales proceeds did not deduct all fees or selling expenses if this is true.  If the sale proceed amount already accounted for the fees and selling expenses, you will not check this box.
11. Also there is a check box you need to check if you sold this property to a related person. if not, leave this unchecked.
12. When everything is said and done and reported correctly, you should be able to claim the capital loss on your Schedule D and 8949, provided you did not sell this to a related person. 

If there is a capital loss of more than $3000, you will be able to claim a $3k capital loss  this year and carryover the remainder indefinitely until you use up the remainder.

@mdd108

[mdd108]

thank you - this  was very helpful, Easy to follow instructions. I  will e file my taxes and mail the form 3520.  Is this Ok?

[PatriciaV]

Yes. Send Form 3520 to the following address.

Internal Revenue Service Center
P.O. Box 409101
Ogden, UT 84409

Form 3520 must have all required attachments to be considered complete.

[dmlj]

Could you please clarify the last sentence of your 1st paragraph--what do you mean by "step 3 of the instructions" ?   Is that Part III on the form??

Also I really do not understand what a "foreign trust" is...   My sister and I sold an inherited home abroad--in that case the buyer is a foreign trust?

My share is $50k, so I do not need to report the sale itself on 3520 Part IV (I did report it under Investments, as you described), but I do need to report that I received the "distribution (any amount) from the foreign trust" and I don't understand how to do that. Where do I enter that?

Thanks

V

[DaveF1006]

It depends. Step 3 of the instructions are found in this link. Select the link and look under the heading in Who Must File. 

A Trust account is an account that keeps track  of client funds given in trust and a firm's operating funds. This ensures that funds are kept safe and managed with full transparency. So a Foreign Trust is simply a trust account within a firm that happens to be in a foreign country. The sale you made does not need to be reported in your 3520 unless the transfer was made in exchange for an obligation or you hold a qualified obligation from that trust that is currently outstanding. A transfer made on behalf of a buyer of your property is not a reporting requirement in this case.

As far as reporting the inheritance, was this placed in a foreign trust and if so, are you certain of this?  If so then, this will be reported in Part 111 in the 3520. The reporting of the foreign trust can be complex and you may consider seeking professional guidance to assist you with this section.

Form 3520 pdf

[dmlj]

Thanks so much DaveF1006 for replying so fast. 

I've been staring at the instructions for 3520 for 2 days now and still struggling to understand.  Why couldn't they just say: "Did you inherit and sell a home abroad?" ...  In my (innocent) understanding of what's written under Who Must File, I fit none of the 4 descriptions.  In my case, there was no trust involved anywhere (I don't even think we have those in my country)...

The apartment sale was pretty simple--the realtor found us a buyer, we signed paperwork at the notary public, and then we all filed into a bank of the buyer's choosing (where I had to open an account in order to receive the money).  The buyer transferred money from their acct, 1/2 to my acct, 1/2 to my sister's acct, and then we each paid the realtor and I also my lawyer, right on the spot in cash (I have all my receipts).  Done. 

So I ended up with a new bank acct in my country of origin with  $51k in it.  I am a US permanent resident, citizen of my country, and I've been paying tax to US since I arrived long time ago.  I know I must file the FBAR (even more confusing!) but do I still have to file 3520 and if yes, what do I enter where for this very simple case?

I have always had the simplest return, so this is quite daunting.  I appreciate any help figuring this out!

V

[dmlj]

Note that I have already filled out my complete return for 2023 in TurboTax online, just waiting to hear about 3520 in case something needs to be modified.  I someone could just tell me which boxes to tick and what info (in simple words) to enter where, I'd be delirious from joy.... 

I am rather pedantic when it comes to paperwork and have always filed early--this year it is hanging over my head like the sword of Damocles because I don't understand the 3520!!

[dmlj]

A question for you too, Patricia.  What are all the attached documents needed, if there was no trust involved, just a sale to a private foreign person through a realtor with the payment deposited directly into a checking acct in a foreign bank?

Thanks much

V

[SusanY1]

It does not sound like you have a distribution from a foreign trust.  It sounds like you have "received certain gifts or bequests from a foreign person".  In that case, unless other assets received in addition to your share of the home exceed $100,000 (US equivalent) then you don't have to file the Form 3520 at all. 

If you do have other assets that total $100,000 inherited in the same year, then you will fill out the form indicating that you're filing an initial return, as an individual, and that you are a US person who received certain gifts or bequests (the bottom check box underneath line "C".)  You would then follow with your name, address, and social security number on line 1 (a-h).

You would then skip to Part IV (line 54) on Page 6.  Here you would list the date, description, and Fair Market Value ("FMV" on the form) of the proceeds from the sale of the home.  

You then sign and date the bottom of the page.  (Assuming you need to file it at all, which I am not convinced at this point you do.)

Hopefully, this will lift that sword of Damocles from over your head!  Please reach out again if questions remain.  

@dmlj 

[dmlj]

May thanks, SusanY1!

Nope, no other assets except $51k my share from the apt sale!  I feel confident about my return now, thanks for all your help TurboTax experts!

V