FOREIGN INHERITANCE AND FORM 3520

By Alex Oware on 06/29/2015 9:47

QUESTION: My brother passed away in Zambia in 2014 (Brother born and raised in Zambia, Zambia citizen, not US). I immigrated to US and became a citizen many years ago. Scenario is: death of non-US person in 2014. The estate is just now being settled. I am about to receive over $100,000, so I will file Form 3520 to report the inheritance. The property has appreciated in value since death. Taxes will be paid in Zambia My questions is, do I have to file schedule D gain on the appreciated portion? For example, date of death value $10,000. Property sold for $15,000. The estate is distributing the money (less attorney fees and taxes paid to Zambia) Monies are distributed to me. Do I, the only heir, need to report a gain of $5,000? Since the estate never distributed the interest in the property and the estate is the owner at the time of sale, is there any gain at all? I have never owned the property; the estate has retained ownership the entire time.

 Should this happen here in the US: the estate held the property, sold the property, the estate would have to report the gain and pay any tax owed. I'm thinking I have to file Form 3520 and no gain to report on my tax return?

 

 

ANSWER: The simple receipt of an inheritance is not a taxable event.  What is taxable is earnings from the property you inherit.  

1. If you receive money, paid directly to you or into a US based account, for the entire amount of the inheritance, the fact that it is foreign in origin is irrelevant.  You will be paying taxes only upon the income from that money.

2. If any of the inheritance is physical property (art work, books, antiques, etc.) there is no tax issue unless and until you sell. But if that is the case, you need to take steps to determine the value of each piece of such property- if that is not already given to you.  If you do sell, your basis in such property (the amount you subtract from the selling price to determine profit) is determined as of the date of death of the person who left it too you.

3. If what you inherit is a financial asset in a foreign country, then you will need txwxwo report that foreign financial account and any income that flows from it.  There are specialized forms for this. There are separate forms for things like bank accounts on the one hand,  and for more complex arrangements, such as trusts, on the other.

 You should note that if there is a tax in the foreign country on the income you receive, there is a US tax credit (see form 1116 - Foreign Tax Credit) for taxes paid to a foreign country on income that both countries tax.

 

 

U.S. taxpayers are taxed on their worldwide income, so if the asset was owned by you at the time it was sold, then yes; it would be reportable on your 1040. However, your post says the asset that was sold was owned by the decedent's estate at the time it was sold.

 If that is true, then you would not report any gain on your own tax return for the sale of that asset. The above responds to your question, but I'd like to add two additional comments about the subject: If your  inheritance consists only of cash, then you will have no basis issues. If you receive other property, such as securities, the usual DOD basis will apply for that property. You are also correct about F-3520. I'm sure many would not realize that form is required ... or even exists. You only need to complete Part IV of that form, plus the identifying information on page 1.
Finally, the "more than $100,000" filing threshold kicks in, I'm sure, based on the value of cash after conversion to $USD.

***Disclaimer: I am a tax accountant and a CPA , but I am not your accountant or advocate (Unless you have signed up to my services). This communication is not intended as tax advice, and no tax accountant -client relationship results**